JMC (TSE:5704) May Have Issues Allocating Its Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into JMC (TSE:5704), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for JMC:

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

0.021 = JP¥77m ÷ (JP¥4.4b - JP¥688m) (Based on the trailing twelve months to September 2024).

Therefore, JMC has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.8%.

See our latest analysis for JMC

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

So How Is JMC's ROCE Trending?

In terms of JMC's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 10.0% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect JMC to turn into a multi-bagger.

The Bottom Line On JMC's ROCE

In summary, it's unfortunate that JMC is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 63% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 2 warning signs with JMC and understanding these should be part of your investment process.

While JMC 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.

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

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.