What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Grand Canyon Education (NASDAQ:LOPE) looks great, so lets see what the trend can tell us.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Grand Canyon Education, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.32 = US$236m ÷ (US$846m - US$100m) (Based on the trailing twelve months to June 2023).
Thus, Grand Canyon Education has an ROCE of 32%. That's a fantastic return and not only that, it outpaces the average of 6.9% earned by companies in a similar industry.
In the above chart we have measured Grand Canyon 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 report for Grand Canyon Education.
So How Is Grand Canyon Education's ROCE Trending?
Grand Canyon Education has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 23%. The company is now earning US$0.3 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 37% less capital than it was five years ago. Grand Canyon Education may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
In a nutshell, we're pleased to see that Grand Canyon Education has been able to generate higher returns from less capital. Considering the stock has delivered 0.5% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.
If you'd like to know about the risks facing Grand Canyon Education, we've discovered 1 warning sign that you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.