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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Skillful Craftsman Education Technology (NASDAQ:EDTK), 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 Skillful Craftsman Education Technology is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = US$3.5m ÷ (US$61m - US$11m) (Based on the trailing twelve months to September 2021).
So, Skillful Craftsman Education Technology has an ROCE of 6.8%. On its own, that's a low figure but it's around the 7.7% average generated by the Consumer Services industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Skillful Craftsman Education Technology's ROCE against it's prior returns. If you'd like to look at how Skillful Craftsman Education Technology has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Skillful Craftsman Education Technology Tell Us?
In terms of Skillful Craftsman Education Technology's historical ROCE movements, the trend isn't fantastic. Around three years ago the returns on capital were 50%, but since then they've fallen to 6.8%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a related note, Skillful Craftsman Education Technology has decreased its current liabilities to 17% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
Our Take On Skillful Craftsman Education Technology's ROCE
In summary, we're somewhat concerned by Skillful Craftsman Education Technology's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last year have experienced a 68% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
On a final note, we found 4 warning signs for Skillful Craftsman Education Technology (1 is concerning) you should be aware of.
While Skillful Craftsman Education Technology 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.