Investors Will Want Groupe JAJ's (EPA:GJAJ) Growth In ROCE To Persist

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Groupe JAJ (EPA:GJAJ) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Groupe JAJ, this is the formula:

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

0.038 = €391k ÷ (€31m - €20m) (Based on the trailing twelve months to September 2024).

Thus, Groupe JAJ has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Luxury industry average of 12%.

Check out our latest analysis for Groupe JAJ

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

So How Is Groupe JAJ's ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 3.8%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 123%. So we're very much inspired by what we're seeing at Groupe JAJ thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Groupe JAJ has a current liabilities to total assets ratio of 66%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Groupe JAJ's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Groupe JAJ has. And since the stock has fallen 11% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Groupe JAJ does come with some risks though, we found 6 warning signs in our investment analysis, and 3 of those are significant...

While Groupe JAJ may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 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.