Investors Could Be Concerned With Jewett-Cameron Trading's (NASDAQ:JCTC.F) Returns On Capital

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 Jewett-Cameron Trading (NASDAQ:JCTC.F), it didn't seem to tick all of these boxes.

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. To calculate this metric for Jewett-Cameron Trading, this is the formula:

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

0.12 = US$2.6m ÷ (US$31m - US$8.7m) (Based on the trailing twelve months to November 2021).

Therefore, Jewett-Cameron Trading has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Building industry average of 14%.

View our latest analysis for Jewett-Cameron Trading

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

How Are Returns Trending?

In terms of Jewett-Cameron Trading's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 20% over the last five 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.

On a side note, Jewett-Cameron Trading's current liabilities have increased over the last five years to 28% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 12%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Jewett-Cameron Trading. These trends are starting to be recognized by investors since the stock has delivered a 23% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you want to know some of the risks facing Jewett-Cameron Trading we've found 4 warning signs (1 is potentially serious!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.