Kip McGrath Education Centres (ASX:KME) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Kip McGrath Education Centres (ASX:KME) 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?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Kip McGrath Education Centres is:

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

0.07 = AU$1.4m ÷ (AU$29m - AU$8.9m) (Based on the trailing twelve months to December 2020).

Therefore, Kip McGrath Education Centres has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 9.4%.

Check out our latest analysis for Kip McGrath Education Centres

roce
roce

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 Kip McGrath Education Centres has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Kip McGrath Education Centres' ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 12% five years ago, while the business's capital employed increased by 89%. Usually this isn't ideal, but given Kip McGrath Education Centres conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Kip McGrath Education Centres probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line On Kip McGrath Education Centres' ROCE

Bringing it all together, while we're somewhat encouraged by Kip McGrath Education Centres' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 408% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing, we've spotted 5 warning signs facing Kip McGrath Education Centres that you might find interesting.

While Kip McGrath Education Centres isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.