Capital Allocation Trends At Bright Scholar Education Holdings (NYSE:BEDU) Aren't Ideal

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Bright Scholar Education Holdings (NYSE:BEDU), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Bright Scholar Education Holdings, this is the formula:

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

0.03 = CN¥93m ÷ (CN¥4.4b - CN¥1.3b) (Based on the trailing twelve months to February 2024).

So, Bright Scholar Education Holdings has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 7.6%.

View our latest analysis for Bright Scholar Education Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Bright Scholar Education Holdings' past further, check out this free graph covering Bright Scholar Education Holdings' past earnings, revenue and cash flow.

What Can We Tell From Bright Scholar Education Holdings' ROCE Trend?

We are a bit worried about the trend of returns on capital at Bright Scholar Education Holdings. To be more specific, the ROCE was 11% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Bright Scholar Education Holdings to turn into a multi-bagger.

What We Can Learn From Bright Scholar Education Holdings' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Unsurprisingly then, the stock has dived 95% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Bright Scholar Education Holdings we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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