When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Overseas Education (SGX:RQ1) we aren't filled with optimism, but let's investigate further.

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. To calculate this metric for Overseas Education, this is the formula:

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

0.033 = S$7.6m ÷ (S$285m - S$53m) (Based on the trailing twelve months to December 2022).

Therefore, Overseas Education has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 8.4%.

Check out our latest analysis for Overseas Education

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 want to delve into the historical earnings, revenue and cash flow of Overseas Education, check out these free graphs here.

So How Is Overseas Education's ROCE Trending?

We are a bit anxious about the trends of ROCE at Overseas Education. To be more specific, today's ROCE was 5.4% five years ago but has since fallen to 3.3%. On top of that, the business is utilizing 20% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

What We Can Learn From Overseas Education's ROCE

In summary, it's unfortunate that Overseas Education is shrinking its capital base and also generating lower returns. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Overseas Education (of which 1 is significant!) that you should know about.

While Overseas Education may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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