J-MAXLtd (TSE:3422) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think J-MAXLtd (TSE:3422) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for J-MAXLtd:

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

0.034 = JP¥1.0b ÷ (JP¥52b - JP¥21b) (Based on the trailing twelve months to March 2024).

Therefore, J-MAXLtd has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 6.6%.

Check out our latest analysis for J-MAXLtd

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

How Are Returns Trending?

When we looked at the ROCE trend at J-MAXLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 18% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

On a side note, J-MAXLtd's current liabilities are still rather high at 41% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From J-MAXLtd's ROCE

To conclude, we've found that J-MAXLtd is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 13% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

J-MAXLtd does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

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.