Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at China Chunlai Education Group (HKG:1969) so let's look a bit deeper.
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 China Chunlai Education Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = CN¥807m ÷ (CN¥6.6b - CN¥2.5b) (Based on the trailing twelve months to February 2024).
Thus, China Chunlai Education Group has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Consumer Services industry average of 12% it's much better.
In the above chart we have measured China Chunlai Education Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for China Chunlai Education Group .
What Does the ROCE Trend For China Chunlai Education Group Tell Us?
We like the trends that we're seeing from China Chunlai Education Group. Over the last five years, returns on capital employed have risen substantially to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 144% more capital is being employed now too. So we're very much inspired by what we're seeing at China Chunlai Education Group thanks to its ability to profitably reinvest capital.
The Key Takeaway
All in all, it's terrific to see that China Chunlai Education Group is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
China Chunlai Education Group does have some risks though, and we've spotted 2 warning signs for China Chunlai Education Group that you might be interested in.
While China Chunlai Education 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.