Did you know that there are some financial metrics that can provide clues to a potential diversified company? In an ideal world, we would like to see a company investing more capital into its business and, ideally, the returns earned on that capital also increasing. Simply put, these types of companies are compounding machines, meaning they constantly reinvest their profits at ever-higher rates of return. In light of this, the trends we are seeing Grand Canyon Education (NASDAQ:LOPE) looks very promising so let's take a look.
Return on Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the “return” (profit before tax) that a company generates on the capital used in its business. To calculate this measure of Grand Canyon education, this is the formula:
Return on Capital Employed = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.32 = $242 million ÷ ($863 million – $100 million) (Based on the trailing twelve months to September 2023).
So, Grand Canyon Education has an ROCE of 32%. This is an impressive return in absolute terms, even better than the consumer services industry average of 7.6%.
View our latest analysis for Grand Canyon Education
In the chart above, we've measured Grand Canyon Education's past ROCE against its past performance, but the future is arguably more important. If you want to know what analysts are forecasting in the future, you should check out our website free Grand Canyon Education Report.
What the ROCE trend can tell us
You might find it hard not to be impressed by Grand Canyon Education's ROCE trend. The data shows that returns on capital increased by 32% over the subsequent five years. This isn't bad because it tells us that for every dollar invested (capital employed), the company is increasing the amount earned on that dollar. In terms of capital employed, Grand Canyon Education appears to be doing more with less, since the company uses 36% less capital to run its operations. If this trend continues, the business may become more efficient but shrink in terms of total assets.
Key takeaways
From what we've seen above, Grand Canyon Education has been able to increase its returns on capital while reducing its capital base. Investors seem to expect more of this going forward, as the stock has rewarded shareholders with a 40% return over the past five years. However, we still believe that the promising fundamentals mean the company deserves further due diligence.
While Grand Canyon Education sounds impressive, no company is worth an infinite price. A graph of the intrinsic value in our business free The research report helps visualize whether LOPE is currently trading at a fair price.
High returns are key to strong performance, so check out our website free A list of stocks that generate high returns on equity with strong balance sheets.
Evaluation is complex, but we help simplify it.
Find out whether Grand Canyon education is overrated or undervalued by reviewing our comprehensive analysis, which includes… Fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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This article written by Simply Wall St is general in nature. We provide comments based on historical data and analyst forecasts only using 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 into account your objectives or financial situation. We aim to offer you focused, long-term analysis driven by fundamental data. Note that our analysis may not take into account the company's most recent price-sensitive announcements or qualitative materials. Simply put, Wall St has no position in any of the stocks mentioned.
