J. Smart (Contractors) (LON:SMJ) 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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 J. Smart (Contractors) (LON:SMJ), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for J. Smart (Contractors):
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.015 = UK£2.0m ÷ (UK£148m - UK£13m) (Based on the trailing twelve months to July 2023).
So, J. Smart (Contractors) has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Construction industry average of 12%.
See our latest analysis for J. Smart (Contractors)
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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of J. Smart (Contractors).
So How Is J. Smart (Contractors)'s ROCE Trending?
When we looked at the ROCE trend at J. Smart (Contractors), we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.5% from 2.3% five years ago. However it looks like J. Smart (Contractors) might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.
The Bottom Line
To conclude, we've found that J. Smart (Contractors) is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 34% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
If you want to know some of the risks facing J. Smart (Contractors) we've found 5 warning signs (2 make us uncomfortable!) that you should be aware of before investing here.
While J. Smart (Contractors) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
