Investors Could Be Concerned With Jerash Holdings (US)'s (NASDAQ:JRSH) Returns On Capital
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Jerash Holdings (US) (NASDAQ:JRSH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Jerash Holdings (US), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.088 = US$6.4m ÷ (US$91m - US$19m) (Based on the trailing twelve months to December 2022).
So, Jerash Holdings (US) has an ROCE of 8.8%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 18%.
View our latest analysis for Jerash Holdings (US)
Above you can see how the current ROCE for Jerash Holdings (US) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Jerash Holdings (US) here for free.
What Does the ROCE Trend For Jerash Holdings (US) Tell Us?
When we looked at the ROCE trend at Jerash Holdings (US), we didn't gain much confidence. To be more specific, ROCE has fallen from 40% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 21%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 8.8%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
What We Can Learn From Jerash Holdings (US)'s ROCE
In summary, Jerash Holdings (US) is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 20% to shareholders over the last three years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
Jerash Holdings (US) does have some risks, we noticed 4 warning signs (and 1 which is concerning) we think you should know about.
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.
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