Some investors may be concerned about Scholastic’s return on capital (NASDAQ:SCHL)
To avoid investing in a declining business, there are a few financial metrics that can provide early indications of aging. More often than not we will see a decline to return to on capital employed (ROCE) and a decrease amount capital employed. Ultimately, this means that the company earns less per dollar invested and, in addition, it reduces its employed capital base. So, after considering School (NASDAQ:SCHL), the above trends didn’t look too good.
Return on capital employed (ROCE): what is it?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for Scholastic:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.054 = $69 million ÷ ($1.9 billion – $659 million) (Based on the last twelve months to February 2022).
So, Scholastic has a ROCE of 5.4%. In absolute terms, this is a low return, but it is around the media industry average of 6.7%.
See our latest review for Scholastic
Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to see how Scholastic has performed in the past in other metrics, you can check out this free chart of past profits, revenue and cash flow.
So what is Scholastic’s ROCE trend?
In terms of Scholastic’s historical ROCE movements, the trend does not inspire confidence. About five years ago, the return on capital was 8.3%, but now it is significantly lower than what we saw above. Meanwhile, the capital employed in the company remained roughly stable over the period. Companies that exhibit these attributes tend not to shrink, but they can be mature and face pressure on their margins from the competition. If these trends continue, we wouldn’t expect Scholastic to turn into a multi-bagger.
Ultimately, the tendency for lower returns on the same amount of capital is generally not an indication that we are considering a growth stock. And long-term shareholders have seen their investments stagnate over the past five years. Unless there is a shift to a more positive trajectory in these measures, we would look elsewhere.
Scholastic has some risks, we’ve noticed 2 warning signs (and 1 which is a little worrying) that we think you should know about.
Although Scholastic doesn’t get the highest yield, check out this free list of companies that achieve high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.