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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Nido Education's (ASX:NDO) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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 Nido Education is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = AU$5.6m ÷ (AU$292m - AU$32m) (Based on the trailing twelve months to June 2024).
Therefore, Nido Education has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 7.9%.
View our latest analysis for Nido Education
In the above chart we have measured Nido Education's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Nido Education .
So How Is Nido Education's ROCE Trending?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last two years to 2.1%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 254%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
What We Can Learn From Nido Education's ROCE
To sum it up, Nido Education has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 11% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for NDO that compares the share price and estimated value.