April 16, 2024

chasepost

Built General Tough

New Oriental Education & Technology Group (NYSE:EDU) May Have Issues Allocating Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount 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. However, after briefly looking over the numbers, we don’t think New Oriental Education & Technology Group (NYSE:EDU) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.

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

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 New Oriental Education & Technology Group is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.035 = US$230m ÷ (US$9.8b – US$3.2b) (Based on the trailing twelve months to February 2021).

So, New Oriental Education & Technology Group has an ROCE of 3.5%. In absolute terms, that’s a low return and it also under-performs the Consumer Services industry average of 7.5%.

View our latest analysis for New Oriental Education & Technology Group

roce

roce

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’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is New Oriental Education & Technology Group’s ROCE Trending?

On the surface, the trend of ROCE at New Oriental Education & Technology Group doesn’t inspire confidence. Over the last five years, returns on capital have decreased to 3.5% from 14% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On New Oriental Education & Technology Group’s ROCE

In summary, New Oriental Education & Technology Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven’t increased much just yet. Investors must think there’s better things to come because the stock has knocked it out of the park, delivering a 313% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn’t high.

New Oriental Education & Technology Group does have some risks though, and we’ve spotted 1 warning sign for New Oriental Education & Technology Group that you might be interested in.

While New Oriental Education & Technology Group 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.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.