Here’s What’s Happening With Returns At JALCO Holdings (TYO:6625)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 on that note, JALCO Holdings (TYO:6625) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for JALCO Holdings, this is the formula:

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

0.043 = JP¥1.1b ÷ (JP¥30b - JP¥3.5b) (Based on the trailing twelve months to September 2020).

So, JALCO Holdings has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 7.0%.

See our latest analysis for JALCO Holdings

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

What The Trend Of ROCE Can Tell Us

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 4.3%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 396%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From JALCO Holdings' ROCE

To sum it up, JALCO Holdings has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we found 2 warning signs for JALCO Holdings (1 is potentially serious) you should be aware of.

While JALCO Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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