There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Bright Scholar Education Holdings (NYSE:BEDU) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Bright Scholar Education Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = CN¥32m ÷ (CN¥327m - CN¥108m) (Based on the trailing twelve months to November 2024).
Therefore, Bright Scholar Education Holdings has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Consumer Services industry average of 11% it's much better.
See our latest analysis for Bright Scholar Education Holdings
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'd like to look at how Bright Scholar Education Holdings has performed in the past in other metrics, you can view this free graph of Bright Scholar Education Holdings' past earnings, revenue and cash flow.
So How Is Bright Scholar Education Holdings' ROCE Trending?
You'd find it hard not to be impressed with the ROCE trend at Bright Scholar Education Holdings. The figures show that over the last five years, returns on capital have grown by 169%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 97% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 33% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
In Conclusion...
From what we've seen above, Bright Scholar Education Holdings has managed to increase it's returns on capital all the while reducing it's capital base. Although the company may be facing some issues elsewhere since the stock has plunged 94% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.
One more thing: We've identified 3 warning signs with Bright Scholar Education Holdings (at least 1 which can't be ignored) , and understanding these would certainly be useful.
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.