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We Like These Underlying Return On Capital Trends At Minsheng Education Group (HKG:1569)

Finding a company that has the potential to grow substantially isn’t easy, but it’s possible if we look at a few key financial metrics. Among other things, we want to see two things; first, a growing one yield on capital employed (ROCE) and secondly an expansion of the company quantity of deployed capital. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked Minsheng Education Group (HKG:1569) and the trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): what is it?

To clarify if you’re not sure, ROCE is a measure of how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation at Minsheng Education Group is:

Return on capital employed = earnings before interest and tax (EBIT) ÷ (total assets – current liabilities)

0.062 = CN¥514m ÷ (CN¥11b – CN¥2.9b) (Based on the last twelve months to June 2022).

So, Minsheng Education Group has a ROCE of 6.2%. In absolute terms, that’s a low return and it’s also underperforming the consumer services industry average of 8.7%.

look at the opportunities and risks within the HK Consumer Services industry.

SEHK:1569 Return on Capital Deployed December 9, 2022

Above you can see how the current ROCE for Minsheng Education Group compares to the previous return on capital, but there is only so much you can tell from the past. To see what analysts are predicting for the future, check out our free report for Minsheng Education Group.

The trend of ROCE

While it’s not a high ROCE in absolute terms, it’s promising to see it moving in the right direction. The figures show that the return on invested capital has grown considerably over the past five years to 6.2%. The company actually makes more money per dollar of capital used, and it’s worth noting that the amount of capital has also increased, by 173%. So we’re very inspired by what we’re seeing at Minsheng Education Group thanks to its ability to profitably reinvest capital.

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On a side note, we noted that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially, the company now has suppliers or short-term creditors funding about 26% of its operations, which isn’t ideal. Keep an eye out for future increases, because when the ratio of current liabilities to total assets becomes particularly high, it can create new risks for the company.

The main takeaway

A company that grows its return on capital and can consistently reinvest in itself is a highly sought-after trait, and that’s what Minsheng Education Group has. And given that the stock is down 68% over the past five years, there may be an opportunity here. It therefore seems warranted to investigate this company further and determine whether these trends will continue.

One more thing to note, we’ve identified 1 warning sign with Minsheng Education Group and understand that it should be part of your investment process.

For those who like to invest solid companies, check this out free list of companies with solid balance sheets and high returns on equity.

Valuation is complex, but we help make it simple.

Find out or Minsheng Education Group may be over or undervalued by reviewing our extensive analysis, including fair value estimates, risks and cautions, dividends, insider trading and financial health.

View the free analysis

This Simply Wall St article is general in nature. We only comment based on historical data and analyst forecasts using an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or your financial situation. We aim to provide you with long-term focused analytics driven by fundamental data. Please note that our analysis may not take into account the latest price sensitive company announcements or quality material. Simply Wall St has no exposure to the listed stocks.

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