JE Cleantech Holdings (NASDAQ:JCSE) Will Want To Turn Around Its Return Trends

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at JE Cleantech Holdings (NASDAQ:JCSE), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for JE Cleantech Holdings, this is the formula:

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).

Therefore, 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%.

View 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're interested in investigating JE Cleantech Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From JE Cleantech Holdings' ROCE Trend?

In terms of JE Cleantech Holdings' historical ROCE movements, the trend isn't fantastic. Over the last three years, returns on capital have decreased to 8.1% from 21% three years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From JE Cleantech Holdings' 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 JE Cleantech Holdings. Despite these promising trends, the stock has collapsed 82% 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.

Like most companies, JE Cleantech Holdings does come with some risks, and we've found 3 warning signs that you should be aware of.

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.