Joules Group (LON:JOUL) May Have Issues Allocating Its Capital

By
Simply Wall St
Published
November 04, 2021
AIM:JOUL
Source: Shutterstock

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Joules Group (LON:JOUL), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

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 Joules Group:

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

0.011 = UK£872k ÷ (UK£173m - UK£91m) (Based on the trailing twelve months to May 2021).

So, Joules Group has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 11%.

View our latest analysis for Joules Group

roce
AIM:JOUL Return on Capital Employed November 5th 2021

Above you can see how the current ROCE for Joules Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Joules Group's ROCE Trending?

When we looked at the ROCE trend at Joules Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.1% from 33% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, Joules Group has a high ratio of current liabilities to total assets of 52%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Joules Group's ROCE

In summary, Joules Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 26% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we've found 2 warning signs for Joules Group that we think you should be aware of.

While Joules Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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