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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at New Oriental Education & Technology Group (NYSE:EDU), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for New Oriental Education & Technology Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = US$436m ÷ (US$7.6b - US$3.1b) (Based on the trailing twelve months to November 2024).
So, New Oriental Education & Technology Group has an ROCE of 9.7%. In absolute terms, that's a low return but it's around the Consumer Services industry average of 11%.
See our latest analysis for New Oriental Education & Technology Group
In the above chart we have measured New Oriental Education & Technology Group'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 New Oriental Education & Technology Group .
What The Trend Of ROCE Can Tell Us
Over the past five years, New Oriental Education & Technology Group's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if New Oriental Education & Technology Group doesn't end up being a multi-bagger in a few years time.
On a side note, New Oriental Education & Technology Group's current liabilities are still rather high at 41% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line
We can conclude that in regards to New Oriental Education & Technology Group's returns on capital employed and the trends, there isn't much change to report on. And investors appear hesitant that the trends will pick up because the stock has fallen 59% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.