Yahoo Finance The Returns On Capital At New Oriental Education & Technology Group (NYSE:EDU) Don't Inspire Confidence
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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think New Oriental Education & Technology Group (NYSE:EDU) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What is Return On Capital Employed (ROCE)?
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. To calculate this metric for New Oriental Education & Technology Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.022 = US$149m ÷ (US$10b - US$3.5b) (Based on the trailing twelve months to May 2021).
Therefore, New Oriental Education & Technology Group has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 8.1%.
View our latest analysis for New Oriental Education & Technology Group
Above you can see how the current ROCE for New Oriental Education & Technology Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For New Oriental Education & Technology Group Tell Us?
In terms of New Oriental Education & Technology Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 14%, but since then they've fallen to 2.2%. 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.
In Conclusion...
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for New Oriental Education & Technology Group. However, despite the promising trends, the stock has fallen 59% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you want to continue researching New Oriental Education & Technology Group, you might be interested to know about the 3 warning signs that our analysis has discovered.
While New Oriental Education & Technology Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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