Slowing Rates Of Return At New Oriental Education & Technology Group (NYSE:EDU) Leave Little Room For Excitement
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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at New Oriental Education & Technology Group's (NYSE:EDU) ROCE trend, we were pretty happy with what we saw.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on New Oriental Education & Technology Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$472m ÷ (US$6.2b - US$2.0b) (Based on the trailing twelve months to February 2023).
Thus, New Oriental Education & Technology Group has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Consumer Services industry average of 6.8% it's much better.
View our latest analysis for New Oriental Education & Technology Group
In the above chart we have measured New Oriental Education & Technology Group'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 New Oriental Education & Technology Group.
How Are Returns Trending?
While the current returns on capital are decent, they haven't changed much. The company has employed 103% more capital in the last five years, and the returns on that capital have remained stable at 11%. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. 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.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 32% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
The Bottom Line
The main thing to remember is that New Oriental Education & Technology Group has proven its ability to continually reinvest at respectable rates of return. However, despite the favorable fundamentals, the stock has fallen 58% over the last five years, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
New Oriental Education & Technology Group could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While New Oriental Education & Technology 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.
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