Bright Scholar Education Holdings (NYSE:BEDU) Is Looking To Continue Growing Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Bright Scholar Education Holdings' (NYSE:BEDU) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Bright Scholar Education Holdings is:

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

0.038 = CN¥282m ÷ (CN¥11b - CN¥3.2b) (Based on the trailing twelve months to May 2021).

So, Bright Scholar Education Holdings has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 8.2%.

View our latest analysis for Bright Scholar Education Holdings

In the above chart we have measured Bright Scholar Education Holdings' 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 Bright Scholar Education Holdings.

The Trend Of ROCE

Bright Scholar Education Holdings has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 3.8% on its capital. And unsurprisingly, like most companies trying to break into the black, Bright Scholar Education Holdings is utilizing 4,111% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 30%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Bright Scholar Education Holdings' ROCE

Long story short, we're delighted to see that Bright Scholar Education Holdings' reinvestment activities have paid off and the company is now profitable. Although the company may be facing some issues elsewhere since the stock has plunged 73% in the last three years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

Bright Scholar Education Holdings does have some risks, we noticed 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.
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