Jesco Holdings' (TSE:1434) Returns On Capital Are Heading Higher

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. With that in mind, we've noticed some promising trends at Jesco Holdings (TSE:1434) so let's look a bit deeper.

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Understanding 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 Jesco Holdings:

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

0.12 = JP¥1.5b ÷ (JP¥18b - JP¥6.1b) (Based on the trailing twelve months to November 2024).

So, Jesco Holdings has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 8.9% it's much better.

View our latest analysis for Jesco Holdings

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

How Are Returns Trending?

The fact that Jesco Holdings is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 12% on its capital. Not only that, but the company is utilizing 131% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line

Long story short, we're delighted to see that Jesco Holdings' reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 292% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Jesco Holdings can keep these trends up, it could have a bright future ahead.

Jesco Holdings does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While Jesco Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.