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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Raffles Education (SGX:NR7) looks quite promising in regards to its trends of return on capital.
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. Analysts use this formula to calculate it for Raffles Education:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = S$18m ÷ (S$1.1b - S$263m) (Based on the trailing twelve months to December 2023).
Thus, Raffles Education has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 9.9%.
View our latest analysis for Raffles Education
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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
We're delighted to see that Raffles Education is reaping rewards from its investments and has now broken into profitability. The company now earns 2.1% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
Our Take On Raffles Education's ROCE
To sum it up, Raffles Education is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 42% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.