Slowing Rates Of Return At New Oriental Education & Technology Group (NYSE:EDU) Leave Little Room For Excitement

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at New Oriental Education & Technology Group (NYSE:EDU) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 New Oriental Education & Technology Group is:

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

0.092 = US$438m ÷ (US$7.7b - US$3.0b) (Based on the trailing twelve months to August 2024).

Therefore, New Oriental Education & Technology Group has an ROCE of 9.2%. Even though it's in line with the industry average of 9.2%, it's still a low return by itself.

Check out our latest analysis for New Oriental Education & Technology Group

In the above chart we have measured New Oriental Education & Technology Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering New Oriental Education & Technology Group for free.

What Can We Tell From New Oriental Education & Technology Group's ROCE Trend?

The returns on capital haven't changed much for New Oriental Education & Technology Group in recent years. The company has consistently earned 9.2% for the last five years, and the capital employed within the business has risen 30% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On New Oriental Education & Technology Group's ROCE

In summary, New Oriental Education & Technology Group has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has declined 53% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think New Oriental Education & Technology Group has the makings of a multi-bagger.

New Oriental Education & Technology Group could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for EDU on our platform quite valuable.

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.