If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at JS Global Lifestyle's (HKG:1691) ROCE trend, we were pretty happy with what we saw.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for JS Global Lifestyle, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$561m ÷ (US$4.8b - US$1.6b) (Based on the trailing twelve months to December 2021).
Therefore, JS Global Lifestyle has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 13% generated by the Consumer Durables industry.
Above you can see how the current ROCE for JS Global Lifestyle compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for JS Global Lifestyle.
What The Trend Of ROCE Can Tell Us
While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 18% and the business has deployed 384% more capital into its operations. 18% is a pretty standard return, and it provides some comfort knowing that JS Global Lifestyle has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
To sum it up, JS Global Lifestyle has simply been reinvesting capital steadily, at those decent rates of return. However, despite the favorable fundamentals, the stock has fallen 57% over the last year, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.
On a final note, we've found 2 warning signs for JS Global Lifestyle that we think 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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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.