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To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Global Education Communities (TSE:GEC), so let's see why.
What Is Return On Capital Employed (ROCE)?
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 Global Education Communities is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = CA$2.8m ÷ (CA$443m - CA$187m) (Based on the trailing twelve months to November 2024).
So, Global Education Communities has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 9.4%.
View our latest analysis for Global Education Communities
Historical performance is a great place to start when researching a stock so above you can see the gauge for Global Education Communities' ROCE against it's prior returns. If you'd like to look at how Global Education Communities has performed in the past in other metrics, you can view this free graph of Global Education Communities' past earnings, revenue and cash flow .
What Does the ROCE Trend For Global Education Communities Tell Us?
We are a bit worried about the trend of returns on capital at Global Education Communities. Unfortunately the returns on capital have diminished from the 1.8% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Global Education Communities to turn into a multi-bagger.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 42%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.