If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think New Oriental Education & Technology Group (NYSE:EDU) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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)
0.039 = US$246m ÷ (US$9.5b - US$3.2b) (Based on the trailing twelve months to November 2020).
Thus, New Oriental Education & Technology Group has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 7.8%.
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 report for New Oriental Education & Technology Group.
What Does the ROCE Trend For New Oriental Education & Technology Group Tell Us?
When we looked at the ROCE trend at New Oriental Education & Technology Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.9% from 13% five years ago. However it looks like New Oriental Education & Technology Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
The Bottom Line On New Oriental Education & Technology Group's ROCE
Bringing it all together, while we're somewhat encouraged by New Oriental Education & Technology Group's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 441% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
If you'd like to know about the risks facing New Oriental Education & Technology Group, we've discovered 1 warning sign that you should be aware of.
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What are the risks and opportunities for New Oriental Education & Technology Group?
Trading at 40.9% below our estimate of its fair value
Earnings are forecast to grow 30.68% per year
No risks detected for EDU from our risks checks.
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.
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