The Returns On Capital At New Oriental Education & Technology Group (NYSE:EDU) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at New Oriental Education & Technology Group (NYSE:EDU) and its ROCE trend, we weren't exactly thrilled.

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 New Oriental Education & Technology Group:

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

0.076 = US$341m ÷ (US$7.1b - US$2.7b) (Based on the trailing twelve months to November 2023).

So, New Oriental Education & Technology Group has an ROCE of 7.6%. Even though it's in line with the industry average of 7.6%, it's still a low return by itself.

See 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 to see what analysts are forecasting going forward, you should check out our free analyst report for New Oriental Education & Technology Group .

So How Is New Oriental Education & Technology Group's ROCE Trending?

In terms of New Oriental Education & Technology Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.6% from 11% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

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

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for New Oriental Education & Technology Group. These trends are starting to be recognized by investors since the stock has delivered a 21% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

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.

While New Oriental Education & Technology Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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

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.