JE Cleantech Holdings (NASDAQ:JCSE) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at JE Cleantech Holdings (NASDAQ:JCSE) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on JE Cleantech Holdings is:

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

0.081 = S$1.8m ÷ (S$35m - S$14m) (Based on the trailing twelve months to December 2022).

Thus, JE Cleantech Holdings has an ROCE of 8.1%. Ultimately, that's a low return and it under-performs the Machinery industry average of 12%.

Check out our latest analysis for JE Cleantech Holdings

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, revenue and cash flow of JE Cleantech Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at JE Cleantech Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 21% over the last three 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On JE Cleantech Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that JE Cleantech Holdings is reinvesting for growth and has higher sales as a result. Despite these promising trends, the stock has collapsed 87% over the last year, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

If you want to continue researching JE Cleantech Holdings, you might be interested to know about the 3 warning signs that our analysis has discovered.

While JE Cleantech Holdings 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.