Returns On Capital At Wah Fu Education Group (NASDAQ:WAFU) Have Stalled
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Wah Fu Education Group's (NASDAQ:WAFU) trend of ROCE, we liked what we saw.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Wah Fu Education Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$2.0m ÷ (US$18m - US$4.3m) (Based on the trailing twelve months to March 2023).
So, Wah Fu Education Group has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 7.2% generated by the Consumer Services industry.
See our latest analysis for Wah Fu Education Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for Wah Fu Education Group's ROCE against it's prior returns. If you'd like to look at how Wah Fu Education Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 62% more capital in the last five years, and the returns on that capital have remained stable at 15%. 15% is a pretty standard return, and it provides some comfort knowing that Wah Fu Education Group has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
The Key Takeaway
In the end, Wah Fu Education Group has proven its ability to adequately reinvest capital at good rates of return. Yet over the last three years the stock has declined 57%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.
Wah Fu Education Group does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...
While Wah Fu Education 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.
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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.
