What trends should we look for if we want to identify stocks that can multiply in value over the long term? In a perfect world, we would like to see a company invest more capital in their business and ideally the returns from that capital also increase. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. Therefore, when we looked at ROCE trends at China Chunlai Education Group (HKG:1969), we liked what we saw.
Return on capital employed (ROCE): what is it?
For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. Analysts use this formula to calculate it for China Chunlai Education Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.20 = CN¥570m ÷ (CN¥5.3b – CN¥2.4b) (Based on the last twelve months to February 2022).
Thereby, China Chunlai Education Group has a ROCE of 20%. In absolute terms, this is an excellent performance and even better than the consumer services industry average of 9.9%.
See our latest analysis for China Chunlai Education Group
Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to see how China Chunlai Education Group has performed in the past in other metrics, you can see this free chart of past profits, revenue and cash flow.
What can we say about the ROCE trend of China Chunlai Education Group?
We would rather be satisfied with capital returns like China Chunlai Education Group. The company has consistently gained 20% over the past five years and the capital employed within the company has increased by 170% over this period. Now considering that the ROCE is an attractive 20%, this combination is actually quite attractive because it means the company can consistently put money to work and generate those high returns. If these trends can continue, we wouldn’t be surprised if the company went multi-bagger.
Another thing to note, China Chunlai Education Group has a high ratio of current liabilities to total assets of 46%. This may entail certain risks, since the company is essentially dependent on its suppliers or other types of short-term creditors. Ideally, we would like this to decrease, as this would mean fewer risky bonds.
What we can learn from China Chunlai Education Group’s ROCE
Ultimately, the company has proven that it can reinvest its capital at high rates of return, which you’ll recall is a trait of a multi-bagger. So it’s no surprise that shareholders have earned a respectable 38% return if they’ve held for the past three years. So while investors seem to recognize these promising trends, we still think the stock warrants further research.
Finally we found 2 warning signs for China Chunlai Education Group which we think you should be aware of.
High yields are a key ingredient to strong performance, so check out our free list of stocks generating high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.