Returns On Capital At JE Cleantech Holdings (NASDAQ:JCSE) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. However, after briefly looking over the numbers, we don't think JE Cleantech Holdings (NASDAQ:JCSE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 JE Cleantech Holdings:

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

0.087 = S$1.9m ÷ (S$35m - S$13m) (Based on the trailing twelve months to June 2023).

Thus, JE Cleantech Holdings has an ROCE of 8.7%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 12%.

Check out our latest analysis for JE Cleantech Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for JE Cleantech Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of JE Cleantech Holdings, check out these free graphs here.

So How Is JE Cleantech Holdings' ROCE Trending?

On the surface, the trend of ROCE at JE Cleantech Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 25% over the last three years. 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.

In Conclusion...

While returns have fallen for JE Cleantech Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 68% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

JE Cleantech Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are significant...

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.