If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. 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. The formula for this calculation on Raffles Education is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = S$11m ÷ (S$1.2b - S$270m) (Based on the trailing twelve months to June 2023).
So, Raffles Education has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 8.9%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Raffles Education's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Raffles Education, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
Raffles Education has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 1.2%, which is always encouraging. 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. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.
The Bottom Line On Raffles Education's ROCE
To bring it all together, Raffles Education has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 60% 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.
One more thing: We've identified 2 warning signs with Raffles Education (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.
While Raffles Education may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.