Did you know there are financial indicators that can give you clues as to whether a stock has the potential to be a multi-bagger? Typically, we want to look at growth trends. return Return on Invested Capital (ROCE) and associated expansion base Simply put, these types of businesses are compound interest machines, meaning they continually reinvest their profits at high rates of return. New Oriental Educational Technology Group (NYSE:EDU) doesn't appear to check all of these boxes.
What is Return on Invested Capital (ROCE)?
For those unfamiliar with what ROCE is, it measures the amount of pre-tax profit a company is able to generate from the capital employed in its business. Analysts use the following formula to calculate New Oriental Education & Technology Group's ROCE:
Return on Invested Capital = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.085 = US$388 million ÷ (US$7.2 billion – US$2.6 billion) (Based on the trailing 12 months ending February 2024).
So, New Oriental Education & Technology Group has an ROCE of 8.5%. While that's a low return in absolute terms, it's on par with the Consumer Services industry average of 7.6%.
View our latest analysis for New Oriental Education & Technology Group
Above you can see how New Oriental Education & Technology Group's current ROCE compares to its prior return on capital, but the history can only tell you so much. If you wish, you can check out forecasts from analysts covering New Oriental Education & Technology Group. free.
So how is New Oriental Education & Technology Group's ROCE trending?
On the surface, New Oriental Education & Technology Group's ROCE trend does not inspire confidence. Around five years ago, return on capital was 12%, which has since fallen to 8.5%. However, given that both revenue and the amount of assets deployed in the business are increasing, the company is investing in growth, and additional capital may be leading to a decline in ROCE in the short term. If these investments are successful, this could bode very well for long-term share price performance.
Conclusion
In summary, despite the low short-term returns, it's good to see New Oriental Education and Technology Group is reinvesting in growth, which is resulting in rising sales. However, these trends don't seem to be impacting returns, as the stock's total returns have been roughly flat over the past five years. We therefore recommend researching this stock further to uncover what the other fundamentals of this business can tell us.
If you are still interested in New Oriental Education & Technology Group, please contact us. Free Intrinsic Value Approximation for EDU This is to see if it is trading at an attractive price in other respects as well.
New Oriental Education & Technology Group isn't earning the highest returns, but take a look. free A list of companies with healthy balance sheets and high return on equity.
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This article by Simply Wall St is general in nature. We use only unbiased methodologies to provide commentary based on historical data and analyst forecasts, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks, and does not take into account your objectives, or your financial situation. We seek to provide long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
