Returns On Capital Signal Tricky Times Ahead For JenobaLtd (TSE:5570)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So while JenobaLtd (TSE:5570) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Return On Capital Employed (ROCE): What Is It?

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 JenobaLtd, this is the formula:

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

0.20 = JP¥670m ÷ (JP¥3.7b - JP¥327m) (Based on the trailing twelve months to March 2024).

Therefore, JenobaLtd has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.

View our latest analysis for JenobaLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for JenobaLtd's ROCE against it's prior returns. If you'd like to look at how JenobaLtd has performed in the past in other metrics, you can view this free graph of JenobaLtd's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at JenobaLtd, we didn't gain much confidence. While it's comforting that the ROCE is high, two years ago it was 25%. 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 may take some time before the company starts to see any change in earnings from these investments.

Our Take On JenobaLtd's ROCE

In summary, JenobaLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 35% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think JenobaLtd has the makings of a multi-bagger.

On a separate note, we've found 2 warning signs for JenobaLtd you'll probably want to know about.

JenobaLtd is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com