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Highlights
- IDP Education's (IEL) ROCE decreased from 39% to 15% over five years.
- Capital employed has increased but sales and competitive position may have weakened.
- Stock price dropped by 33% over the last five years.
When investors search for potential high-growth opportunities, they usually examine key trends like Return on Capital Employed (ROCE) and capital employment growth. These factors are significant as they reveal whether a company can effectively reinvest its earnings and generate higher returns. Taking IDP Education (ASX:IEL) as our focus, we notice some intriguing numbers.
Evaluating ROCE in IDP Education
ROCE is a vital metric that compares a firm's pre-tax profit to its capital employed. By using this, analysts can calculate the efficiency and profitability of a company. For IDP Education, the ROCE currently stands at 15%:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
With a reported earnings of AU$165 million and assets totaling AU$1.4 billion against liabilities of AU$297 million (based on data up to December 2024), the results reflect a fair performance. However, it notably surpasses the Consumer Services industry average of 9.4%.
Investigating the ROCE Trend
Despite the fair ROCE, IDP Education's performance over the past five years shows a reduction from 39% to 15%. During this same period, sales have dwindled while more capital is being employed, hinting at potential issues such as loss of competitive advantage or market share erosion. This scenario suggests that even though more resources are being allocated, the returns are not proportional, leading to decreased efficiency in generating ROCE.
Capital and Liability Insights
Another factor potentially impacting the ROCE is the reduction of current liabilities to 21% of total assets. This shift implies less reliance on short-term creditor funding, translating to lower risk but also to decreased operational efficiency concerning capital returns.
The current analysis presents a cautious outlook on IDP Education, with their stocks observing a 33% dip over the last five years. The diminishing returns and increased capital usage call for attention. Those interested in continued research might find it useful to examine other companies with higher returns on equity exceeding 25%.
