Yahoo Finance How Do GSX Techedu Inc.’s (NYSE:GSX) Returns Compare To Its Industry?
Today we'll look at GSX Techedu Inc. (NYSE:GSX) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect 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. Generally speaking a higher ROCE is better. 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.
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for GSX Techedu:
0.044 = CN¥72m ÷ (CN¥2.6b - CN¥1.0b) (Based on the trailing twelve months to September 2019.)
So, GSX Techedu has an ROCE of 4.4%.
View our latest analysis for GSX Techedu
Does GSX Techedu Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, GSX Techedu's ROCE appears to be significantly below the 8.5% average in the Consumer Services industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside GSX Techedu's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.
You can see in the image below how GSX Techedu's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for GSX Techedu.
How GSX Techedu's Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
GSX Techedu has current liabilities of CN¥1.0b and total assets of CN¥2.6b. Therefore its current liabilities are equivalent to approximately 38% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, GSX Techedu's ROCE is concerning.
The Bottom Line On GSX Techedu's ROCE
This company may not be the most attractive investment prospect. Of course, you might also be able to find a better stock than GSX Techedu. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
