Investors Could Be Concerned With JAICLtd's (TSE:7073) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at JAICLtd (TSE:7073) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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. To calculate this metric for JAICLtd, this is the formula:

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

0.051 = JP¥96m ÷ (JP¥2.7b - JP¥808m) (Based on the trailing twelve months to July 2024).

Thus, JAICLtd has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 8.7%.

See our latest analysis for JAICLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of JAICLtd.

What Does the ROCE Trend For JAICLtd Tell Us?

We weren't thrilled with the trend because JAICLtd's ROCE has reduced by 75% over the last five years, while the business employed 34% more capital. That being said, JAICLtd raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. JAICLtd probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

Our Take On JAICLtd's ROCE

While returns have fallen for JAICLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Despite these promising trends, the stock has collapsed 70% over the last five years, so there could be other factors hurting the company's prospects. Therefore, we'd suggest researching the stock further to uncover more about the business.

JAICLtd does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While JAICLtd 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.