Is Bright Scholar Education Holdings Limited (NYSE:BEDU) Creating Value For Shareholders?
Today we'll evaluate Bright Scholar Education Holdings Limited (NYSE:BEDU) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Bright Scholar Education Holdings:
0.10 = CN¥317m ÷ (CN¥4.2b - CN¥1.1b) (Based on the trailing twelve months to November 2018.)
Therefore, Bright Scholar Education Holdings has an ROCE of 10%.
Check out our latest analysis for Bright Scholar Education Holdings
Does Bright Scholar Education Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. It appears that Bright Scholar Education Holdings's ROCE is fairly close to the Consumer Services industry average of 10%. Separate from how Bright Scholar Education Holdings stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
Bright Scholar Education Holdings reported an ROCE of 10% -- better than 3 years ago, when the company didn't make a profit. That suggests the business has returned to profitability.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Bright Scholar Education Holdings.
What Are Current Liabilities, And How Do They Affect Bright Scholar Education Holdings's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Bright Scholar Education Holdings has total assets of CN¥4.2b and current liabilities of CN¥1.1b. Therefore its current liabilities are equivalent to approximately 26% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.
What We Can Learn From Bright Scholar Education Holdings's ROCE
That said, Bright Scholar Education Holdings's ROCE is mediocre, there may be more attractive investments around. Of course, you might also be able to find a better stock than Bright Scholar Education Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
