Today we'll evaluate RISE Education Cayman Ltd (NASDAQ:REDU) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for RISE Education Cayman:

0.15 = CN¥219m ÷ (CN¥2.8b - CN¥1.4b) (Based on the trailing twelve months to March 2019.)

So, RISE Education Cayman has an ROCE of 15%.

Check out our latest analysis for RISE Education Cayman

Does RISE Education Cayman Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that RISE Education Cayman's ROCE is meaningfully better than the 10% average in the Consumer Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where RISE Education Cayman sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

RISE Education Cayman has an ROCE of 15%, but it didn't have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how RISE Education Cayman's past growth compares to other companies.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for RISE Education Cayman.