Consumer services

Minsheng Education Group’s return on capital (HKG: 1569) does not reflect well on the company

If you are looking for a multi-bagger, there are a few things to look out for. A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in connection with growth amount capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. That said, from the first glance at Minsheng Education Group (HKG: 1569) we’re not jumping from our chairs on the yield trend, but taking a closer look.

Return on capital employed (ROCE): what is it?

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for Minsheng Education Group:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.045 = CN ¥ 319m ÷ (CN ¥ 9.1b – CN ¥ 2.0b) (Based on the last twelve months up to December 2020).

Therefore, Minsheng Education Group has a ROCE of 4.5%. In absolute terms, this is a low return and it is also below the consumer service industry average of 7.9%.

See our latest analysis for Minsheng Education Group

SEHK: 1569 Return on capital employed on June 2, 2021

Above, you can see how Minsheng Education Group’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for the Minsheng Education Group.

So what is the ROCE trend of Minsheng Education Group?

On the surface, the ROCE trend at Minsheng Education Group does not inspire confidence. Over the past five years, return on capital has fallen to 4.5% from 12% five years ago. However, as both capital employed and income have increased, it appears that the company is currently continuing to grow, resulting in short-term returns. And if the capital increase generates additional returns, the company, and therefore the shareholders, will benefit in the long run.

Our opinion on the ROCE of Minsheng Education Group

As returns have plummeted for Minsheng Education Group lately, we are encouraged to see sales increasing and the company reinvesting in its operations. These growth trends have not led to growth returns, however, as the stock has fallen 37% in the past three years. So we think it would be interesting to dig deeper into this title given that the trends seem encouraging.

On a separate note, we have found 4 warning signs for Minsheng Education Group you will probably want to know more.

For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.

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