There Are Reasons To Feel Uneasy About JE Cleantech Holdings' (NASDAQ:JCSE) 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating JE Cleantech Holdings (NASDAQ:JCSE), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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)

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

So, JE Cleantech Holdings has an ROCE of 8.7%. Ultimately, that's a low return and it under-performs the Machinery industry average of 13%.

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 covering JE Cleantech Holdings' past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at JE Cleantech Holdings doesn't inspire confidence. Around three years ago the returns on capital were 25%, but since then they've fallen to 8.7%. 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.

Our Take On 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. However, despite the promising trends, the stock has fallen 52% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about JE Cleantech Holdings, we've spotted 3 warning signs, and 2 of them can't be ignored.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.