Is Kip McGrath Education Centres (ASX: KME) Struggling to Optimize Its Capital? Insights for Investors

What should we look for in stocks that could grow significantly over time? First, we want to see a strong, increasing return on capital employed (ROCE). Second, we want to ensure the company is expanding its base of capital. This indicates the company can reinvest its earnings effectively, boosting returns in the long run.

Let’s take a closer look at Kip McGrath Education Centres (ASX:KME). Their current ROCE stands at 6.9%, which is below the Consumer Services industry average of 8.1%. This means that while the company is generating some returns, they aren’t particularly strong compared to its peers.

If you’re curious about ROCE, it measures how well a company returns profits based on the capital used in the business. The calculation for Kip McGrath is:

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

For Kip McGrath, that is:

0.069 = AU$1.9m ÷ (AU$35m – AU$7.9m)

Over the last five years, Kip McGrath’s ROCE has decreased from 26% to its current level. Although this drop is concerning, it’s also important to note that both revenue and total assets have increased. This suggests the company is investing in growth, even if that has initially reduced its ROCE. If these investments lead to higher returns down the line, it could benefit shareholders in the end.

Additionally, Kip McGrath has decreased its current liabilities to 23% of total assets. This change indicates the company is financing less of its operations with money owed to suppliers or creditors. While some may view this approach as less efficient concerning ROCE, it can also reduce risk.

Even with the current dip in returns, the rising revenues and capital employed are promising signs. However, it’s worth noting that the stock has dropped 68% over the past five years. This could hint at a potential opportunity for savvy investors who are willing to dig deeper into the company’s future prospects.

If you want to explore Kip McGrath Education Centres further, you might spot some warning signs in their operations. It’s wise to consider these factors before making any investment decisions.

In the world of investing, searching for companies with strong fundamentals and solid earnings can lead to better choices. Stay informed, do your research, and keep an eye on market trends.