We Like These Underlying Trends At Bright Scholar Education Holdings (NYSE:BEDU)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Bright Scholar Education Holdings (NYSE:BEDU) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Bright Scholar Education Holdings:

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

0.045 = CN¥322m ÷ (CN¥10b - CN¥3.1b) (Based on the trailing twelve months to November 2020).

So, Bright Scholar Education Holdings has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 7.8%.

See our latest analysis for Bright Scholar Education Holdings

Above you can see how the current ROCE for Bright Scholar Education Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Bright Scholar Education Holdings here for free.

What The Trend Of ROCE Can Tell Us

Bright Scholar Education Holdings has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 4.5% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Bright Scholar Education Holdings is utilizing 9,821% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

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. This tells us that Bright Scholar Education Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

Overall, Bright Scholar Education Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 66% in the last three years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Bright Scholar Education Holdings does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is concerning...

While Bright Scholar Education Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

If you decide to trade Bright Scholar Education Holdings, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.