There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continuously reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in First High-School Education Group’s (NYSE:FHS) returns on capital, so let’s have a look.
Understanding Return On Capital Employed (ROCE)
For those who 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. Analysts use this formula to calculate it for First High-School Education Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.21 = CN¥81m ÷ (CN¥774m – CN¥392m) (Based on the trailing twelve months to March 2022).
So, First High-School Education Group has an ROCE of 21%. In absolute terms that’s a great return and it’s even better than the Consumer Services industry average of 6.2%.
See our latest analysis for First High-School Education Group
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 First High-School 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 First High-School Education Group. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 21%. Basically the business is earning more per dollar of capital invested and in addition to that, 288% more capital is being employed now too. The increasing returns on a growing amount of capital is common among multi-baggers and that’s why we’re impressed.
One more thing to note, First High-School Education Group has decreased current liabilities to 51% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business’ fundamental improvements, rather than a cooking class featuring this company’s books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.
The Key Takeaway
In summary, it’s great to see that First High-School Education Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Although the company may be facing some issues elsewhere since the stock has plunged 78% in the last year. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
Like most companies, First High-School Education Group does come with some risks, and we’ve found 1 warning sign that you should be aware of.
If you’d like to see other companies earning high returns, check out ours free list of companies earning high returns with solid balance sheets here.
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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 into account 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.