Be Wary Of Janco Holdings (HKG:8035) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Looking at Janco Holdings (HKG:8035), it does have a high ROCE right now, but lets see how returns are trending.

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. Analysts use this formula to calculate it for Janco Holdings:

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

0.25 = HK$29m ÷ (HK$332m - HK$217m) (Based on the trailing twelve months to September 2021).

Therefore, Janco Holdings has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

View our latest analysis for Janco Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Janco Holdings' ROCE against it's prior returns. If you're interested in investigating Janco Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Janco Holdings Tell Us?

When we looked at the ROCE trend at Janco Holdings, we didn't gain much confidence. To be more specific, while the ROCE is still high, it's fallen from 33% where it was five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Janco Holdings' current liabilities have increased over the last five years to 65% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 25%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Janco Holdings is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 29% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know about the risks facing Janco Holdings, we've discovered 4 warning signs that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.