Are Jerash Holdings (US), Inc.’s (NASDAQ:JRSH) Returns On Investment Worth Your While?
Today we'll evaluate Jerash Holdings (US), Inc. (NASDAQ:JRSH) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Jerash Holdings (US):
0.13 = US$7.0m ÷ (US$60m - US$7.8m) (Based on the trailing twelve months to December 2018.)
Therefore, Jerash Holdings (US) has an ROCE of 13%.
See our latest analysis for Jerash Holdings (US)
Is Jerash Holdings (US)'s ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, Jerash Holdings (US)'s ROCE appears to be around the 14% average of the Luxury industry. Regardless of where Jerash Holdings (US) sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Jerash Holdings (US)'s current ROCE of 13% is lower than 3 years ago, when the company reported a 55% ROCE. Therefore we wonder if the company is facing new headwinds.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our freereport on analyst forecasts for Jerash Holdings (US).
Jerash Holdings (US)'s Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
Jerash Holdings (US) has total assets of US$60m and current liabilities of US$7.8m. As a result, its current liabilities are equal to approximately 13% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
The Bottom Line On Jerash Holdings (US)'s ROCE
With that in mind, Jerash Holdings (US)'s ROCE appears pretty good. Of course you might be able to find a better stock than Jerash Holdings (US). So you may wish to see this freecollection of other companies that have grown earnings strongly.
For those who like to find winning investments this freelist of growing companies with recent insider purchasing, could be just the ticket.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.