What Should You Know About China Distance Education Holdings Limited’s (NYSE:DL) Return On Capital?

Purchasing China Distance Education Holdings gives you an ownership stake in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Thus, to understand how your money can grow by investing in China Distance Education Holdings, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).

View our latest analysis for China Distance Education Holdings

ROCE: Explanation and Calculation

You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. We’ll look at China Distance Education Holdings’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. DL’s ROCE is calculated below:

ROCE Calculation for DL

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = US\$10.89M ÷ (US\$259.25M – US\$167.29M) = 11.84%

DL’s 11.84% ROCE means that for every \$100 you invest, the company creates \$11.8. This makes China Distance Education Holdings slightly mediocre when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital will be able to compound over time, but still may be missing out on some potential growth elsewhere.

What is causing this?

The underperforming ROCE is not ideal for China Distance Education Holdings investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, DL’s ROCE may increase, in which case your portfolio could benefit from holding the company. Because of this, it is important to look beyond the final value of DL’s ROCE and understand what is happening to the individual components. Three years ago, DL’s ROCE was 38.36%, which means the company’s capital returns have worsened. In this time, earnings have fallen from US\$28.94M to US\$10.89M and capital employed has increased due to a hike in the level of total assets employed , which means the company’s ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.

Next Steps

ROCE for DL investors has fallen in the last few years and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. However, it is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as the management team and valuation. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.

1. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for China Distance Education Holdings’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
2. Valuation: What is DL worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether DL is currently undervalued by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.