New Oriental Education & Technology Group (NYSE:EDU) Is Reinvesting At Lower Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at New Oriental Education & Technology Group (NYSE:EDU), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for New Oriental Education & Technology Group:

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

0.085 = US$388m ÷ (US$7.2b - US$2.6b) (Based on the trailing twelve months to February 2024).

So, New Oriental Education & Technology Group has an ROCE of 8.5%. In absolute terms, that's a low return but it's around the Consumer Services industry average of 7.6%.

View our latest analysis for New Oriental Education & Technology Group

roce

Above you can see how the current ROCE for New Oriental Education & Technology Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering New Oriental Education & Technology Group for free.

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. Around five years ago the returns on capital were 12%, but since then they've fallen to 8.5%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that New Oriental Education & Technology Group is reinvesting for growth and has higher sales as a result. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you're still interested in New Oriental Education & Technology Group it's worth checking out our FREE intrinsic value approximation for EDU to see if it's trading at an attractive price in other respects.

While New Oriental Education & Technology Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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 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.