Jewett-Cameron Trading (NASDAQ:JCTC.F) Is Reinvesting At Lower Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Jewett-Cameron Trading (NASDAQ:JCTC.F), it didn't seem to tick all of these boxes.

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

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 Jewett-Cameron Trading, this is the formula:

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

0.11 = US$2.8m ÷ (US$37m - US$13m) (Based on the trailing twelve months to May 2022).

So, Jewett-Cameron Trading has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 14% generated by the Building industry.

Check out 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're interested in investigating Jewett-Cameron Trading's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Jewett-Cameron Trading's ROCE Trend?

On the surface, the trend of ROCE at Jewett-Cameron Trading doesn't inspire confidence. To be more specific, ROCE has fallen from 22% over the last five 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 34%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line On Jewett-Cameron Trading's ROCE

While returns have fallen for Jewett-Cameron Trading in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 19% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 4 warning signs we've spotted with Jewett-Cameron Trading (including 1 which doesn't sit too well with us) .

While Jewett-Cameron Trading isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.