Some Investors May Be Worried About Educational Development's (NASDAQ:EDUC) 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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Although, when we looked at Educational Development (NASDAQ:EDUC), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Educational Development is:

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

0.09 = US$6.3m ÷ (US$108m - US$38m) (Based on the trailing twelve months to May 2022).

So, Educational Development has an ROCE of 9.0%. In absolute terms, that's a low return and it also under-performs the Retail Distributors industry average of 14%.

View our latest analysis for Educational Development

Historical performance is a great place to start when researching a stock so above you can see the gauge for Educational Development's ROCE against it's prior returns. If you're interested in investigating Educational Development's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Educational Development's ROCE Trend?

On the surface, the trend of ROCE at Educational Development doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 9.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Educational Development have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 26% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 4 warning signs with Educational Development (at least 2 which are a bit concerning) , and understanding these would certainly be useful.

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.