Is J. Smart (Contractors) (LON:SMJ) Set To Make A Turnaround?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into J. Smart (Contractors) (LON:SMJ), the trends above didn't look too great.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on J. Smart (Contractors) is:

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

0.012 = UK£1.2m ÷ (UK£115m - UK£13m) (Based on the trailing twelve months to July 2020).

Thus, J. Smart (Contractors) has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 13%.

See our latest analysis for J. Smart (Contractors)

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

So How Is J. Smart (Contractors)'s ROCE Trending?

We are a bit worried about the trend of returns on capital at J. Smart (Contractors). To be more specific, the ROCE was 2.5% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect J. Smart (Contractors) to turn into a multi-bagger.

The Bottom Line On J. Smart (Contractors)'s ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Despite the concerning underlying trends, the stock has actually gained 36% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know about the risks facing J. Smart (Contractors), we've discovered 3 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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