There Are Reasons To Feel Uneasy About Jardine Cycle & Carriage's (SGX:C07) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. In light of that, when we looked at Jardine Cycle & Carriage (SGX:C07) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Jardine Cycle & Carriage is:

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

0.079 = US$1.7b ÷ (US$29b - US$7.6b) (Based on the trailing twelve months to December 2021).

Thus, Jardine Cycle & Carriage has an ROCE of 7.9%. On its own, that's a low figure but it's around the 7.0% average generated by the Industrials industry.

See our latest analysis for Jardine Cycle & Carriage

In the above chart we have measured Jardine Cycle & Carriage's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Jardine Cycle & Carriage.

The Trend Of ROCE

On the surface, the trend of ROCE at Jardine Cycle & Carriage doesn't inspire confidence. To be more specific, ROCE has fallen from 10% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Jardine Cycle & Carriage's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Jardine Cycle & Carriage. And there could be an opportunity here if other metrics look good too, because the stock has declined 35% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know about the risks facing Jardine Cycle & Carriage, we've discovered 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.