Returns On Capital Signal Difficult Times Ahead For Top Education Group (HKG:1752)

When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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. In light of that, from a first glance at Top Education Group (HKG:1752), we've spotted some signs that it could be struggling, so let's investigate.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Top Education Group is:

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

0.045 = AU$2.8m ÷ (AU$79m - AU$16m) (Based on the trailing twelve months to June 2025).

So, Top Education Group has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 10%.

Check out our latest analysis for Top 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 Top Education Group's past further, check out this free graph covering Top Education Group's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Top Education Group's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 8.5%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Top Education Group to turn into a multi-bagger.

The Bottom Line On Top Education Group's ROCE

In summary, it's unfortunate that Top Education Group is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 61% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a separate note, we've found 3 warning signs for Top Education Group you'll probably want to know about.

While Top Education 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.