We Think Grand Canyon Education (NASDAQ:LOPE) Might Have The DNA Of A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Grand Canyon Education (NASDAQ:LOPE) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Grand Canyon Education, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.32 = US$236m ÷ (US$846m - US$100m) (Based on the trailing twelve months to June 2023).

So, Grand Canyon Education has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Consumer Services industry average of 7.0%.

View our latest analysis for Grand Canyon Education

In the above chart we have measured Grand Canyon Education's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Grand Canyon Education.

What The Trend Of ROCE Can Tell Us

We're pretty happy with how the ROCE has been trending at Grand Canyon Education. The figures show that over the last five years, returns on capital have grown by 23%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Grand Canyon Education appears to been achieving more with less, since the business is using 37% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

What We Can Learn From Grand Canyon Education's ROCE

In summary, it's great to see that Grand Canyon Education has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has only returned 3.1% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Grand Canyon Education does have some risks though, and we've spotted 1 warning sign for Grand Canyon Education that you might be interested in.

Grand Canyon Education is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.