We're Watching These Trends At Just Life Group (NZSE:JLG)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So, when we ran our eye over Just Life Group's (NZSE:JLG) trend of ROCE, we liked what we saw.

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 Just Life Group:

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

0.16 = NZ$4.4m ÷ (NZ$33m - NZ$5.6m) (Based on the trailing twelve months to December 2020).

So, Just Life Group has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 15%.

Check out our latest analysis for Just Life Group

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

What Does the ROCE Trend For Just Life Group Tell Us?

While the current returns on capital are decent, they haven't changed much. The company has employed 121% more capital in the last five years, and the returns on that capital have remained stable at 16%. Since 16% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

In Conclusion...

The main thing to remember is that Just Life Group has proven its ability to continually reinvest at respectable rates of return. And the stock has done incredibly well with a 494% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Just Life Group, we've discovered 3 warning signs that you should be aware of.

While Just Life Group 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. 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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