The Returns At Jensen-Group (EBR:JEN) Provide Us With Signs Of What's To Come

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Jensen-Group (EBR:JEN), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Jensen-Group:

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

0.049 = €9.1m ÷ (€277m - €91m) (Based on the trailing twelve months to June 2020).

Thus, Jensen-Group has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 8.6%.

See our latest analysis for Jensen-Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jensen-Group's ROCE against it's prior returns. If you'd like to look at how Jensen-Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Jensen-Group Tell Us?

On the surface, the trend of ROCE at Jensen-Group doesn't inspire confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 4.9%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Jensen-Group has decreased its current liabilities to 33% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Jensen-Group's ROCE

In summary, we're somewhat concerned by Jensen-Group's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 7.4% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Jensen-Group does have some risks, we noticed 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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