If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Hailiang Education Group's (NASDAQ:HLG) returns on capital, so let's have a look.
Understanding 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. The formula for this calculation on Hailiang Education Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = CN¥613m ÷ (CN¥3.3b - CN¥1.0b) (Based on the trailing twelve months to June 2021).
Thus, Hailiang Education Group has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 6.5% earned by companies in a similar industry.
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're interested in investigating Hailiang Education Group's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Investors would be pleased with what's happening at Hailiang Education Group. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 27%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 144%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 31% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
In Conclusion...
All in all, it's terrific to see that Hailiang Education Group is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 72% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Like most companies, Hailiang Education Group does come with some risks, and we've found 1 warning sign that you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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