Capital returns at China Vocational Education Holdings (HKG: 1756) do not inspire confidence

There are a few key trends to look out for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. However, after investigating Vocational Education Holdings in China (HKG:1756), we don’t think current trends fit the mold of a multi-bagger.

What is return on capital employed (ROCE)?

If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. The formula for this calculation on China Vocational Education Holdings is as follows:

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

0.077 = CN¥391m ÷ (CN¥6.4b – CN¥1.3b) (Based on the last twelve months to February 2022).

Thereby, China Vocational Education Holdings posted a ROCE of 7.7%. In absolute terms, this is a weak return and it is also below the consumer services industry average of 9.9%.

See our latest analysis for China Vocational Education Holdings

SEHK:1756 Return on capital employed June 23, 2022

In the chart above, we measured China Vocational Education Holdings’ past ROCE against its past performance, but the future is arguably more important. If you wish, you can view analyst forecasts covering China Vocational Education Holdings here for free.

What the ROCE trend can tell us

In terms of historical ROCE movements of China Vocational Education Holdings, the trend is not fantastic. About five years ago, the return on capital was 11%, but since then it has fallen to 7.7%. Although, given that revenue and the amount of assets used in the business have increased, it could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. If these investments prove successful, it can bode very well for long-term stock performance.

Furthermore, China Vocational Education Holdings has done well to repay its short-term debt to 20% of total assets. So we could tie some of that to the decline in ROCE. In effect, this means that their suppliers or short-term creditors finance the business less, which reduces certain elements of risk. Some would argue that this reduces the company’s effectiveness in generating a return on investment, as it now funds more of the operations with its own money.

In conclusion…

While yields have fallen for China Vocational Education Holdings lately, we are encouraged to see that sales are increasing and the company is reinvesting in its operations. However, despite the promising trends, the stock has fallen 57% in the past year, so there could be an opportunity here for shrewd investors. So we think it would be worth taking a closer look at this stock as the trends look encouraging.

If you want to know more about China Vocational Education Holdings, we spotted 4 warning signs, and 1 of them is a little unpleasant.

For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.

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.

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