In This Article:
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Raffles Education's (SGX:NR7) returns on capital, so let's have a look.
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 Raffles Education:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.017 = S$16m ÷ (S$1.1b - S$169m) (Based on the trailing twelve months to June 2024).
So, Raffles Education has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 9.9%.
Check out our latest analysis for Raffles Education
Historical performance is a great place to start when researching a stock so above you can see the gauge for Raffles Education's ROCE against it's prior returns. If you'd like to look at how Raffles Education has performed in the past in other metrics, you can view this free graph of Raffles Education's past earnings, revenue and cash flow.
The Trend Of ROCE
Raffles Education has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 1.7% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
In Conclusion...
To bring it all together, Raffles Education has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 53% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.