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If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Global Education Communities (TSE:GEC) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)
0.027 = CA$9.8m ÷ (CA$482m - CA$124m) (Based on the trailing twelve months to February 2024).
Thus, Global Education Communities has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 7.6%.
See 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Global Education Communities.
What Does the ROCE Trend For Global Education Communities Tell Us?
When we looked at the ROCE trend at Global Education Communities, we didn't gain much confidence. To be more specific, ROCE has fallen from 4.6% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that Global Education Communities is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 47% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.