Jadroplov d.d (ZGSE:JDPL) Knows How To Allocate Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Jadroplov d.d (ZGSE:JDPL) looks great, so lets see what the trend can tell us.

Understanding 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. To calculate this metric for Jadroplov d.d, this is the formula:

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

0.33 = Kn124m ÷ (Kn427m - Kn54m) (Based on the trailing twelve months to September 2020).

Thus, Jadroplov d.d has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Shipping industry average of 5.4%.

Check out our latest analysis for Jadroplov d.d

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

What Can We Tell From Jadroplov d.d's ROCE Trend?

It's great to see that Jadroplov d.d has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 33% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 58% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

In Conclusion...

From what we've seen above, Jadroplov d.d has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 57% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

Jadroplov d.d does have some risks though, and we've spotted 1 warning sign for Jadroplov d.d that you might be interested in.

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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