The Returns On Capital At Scholastic (NASDAQ:SCHL) Don't Inspire Confidence

By
Simply Wall St
Published
November 02, 2021
NasdaqGS:SCHL
Source: Shutterstock

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Scholastic (NASDAQ:SCHL), we weren't too upbeat about how things were going.

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. Analysts use this formula to calculate it for Scholastic:

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

0.019 = US$24m ÷ (US$1.9b - US$662m) (Based on the trailing twelve months to August 2021).

So, Scholastic has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Media industry average of 9.6%.

See our latest analysis for Scholastic

roce
NasdaqGS:SCHL Return on Capital Employed November 3rd 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Scholastic's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Scholastic, check out these free graphs here.

So How Is Scholastic's ROCE Trending?

We are a bit worried about the trend of returns on capital at Scholastic. To be more specific, the ROCE was 8.6% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Scholastic becoming one if things continue as they have.

Our Take On Scholastic's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Despite the concerning underlying trends, the stock has actually gained 3.1% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Scholastic does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

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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