There Are Reasons To Feel Uneasy About Kip McGrath Education Centres' (ASX:KME) Returns On Capital
If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Kip McGrath Education Centres (ASX:KME), it didn't seem to tick all of these boxes.
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. The formula for this calculation on Kip McGrath Education Centres is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = AU$1.7m ÷ (AU$36m - AU$10m) (Based on the trailing twelve months to December 2023).
Therefore, Kip McGrath Education Centres has an ROCE of 6.8%. In absolute terms, that's a low return but it's around the Consumer Services industry average of 7.7%.
Check out our latest analysis for Kip McGrath Education Centres
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're interested in investigating Kip McGrath Education Centres' past further, check out this free graph covering Kip McGrath Education Centres' past earnings, revenue and cash flow.
What Can We Tell From Kip McGrath Education Centres' ROCE Trend?
In terms of Kip McGrath Education Centres' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 26%, but since then they've fallen to 6.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Kip McGrath Education Centres' ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kip McGrath Education Centres. However, despite the promising trends, the stock has fallen 60% 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'd like to know more about Kip McGrath Education Centres, we've spotted 3 warning signs, and 1 of them is significant.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
