There Are Reasons To Feel Uneasy About New Oriental Education & Technology Group's (NYSE:EDU) Returns On Capital

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.064 = US$264m ÷ (US$6.0b - US$1.9b) (Based on the trailing twelve months to November 2022).

Therefore, New Oriental Education & Technology Group has an ROCE of 6.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.0%.

View our latest analysis for New Oriental Education & Technology Group

Above you can see how the current ROCE for New Oriental Education & Technology Group 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 New Oriental Education & Technology Group here for free.

How Are Returns Trending?

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 6.4% from 14% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, New Oriental Education & Technology Group has decreased its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

In summary, we're somewhat concerned by New Oriental Education & Technology Group's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 50% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

While New Oriental Education & Technology Group doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

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.

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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.