JELD-WEN Holding's (NYSE:JELD) Returns On Capital Not Reflecting Well On The Business
To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at JELD-WEN Holding (NYSE:JELD) 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 JELD-WEN Holding, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.079 = US$229m ÷ (US$3.8b - US$919m) (Based on the trailing twelve months to March 2022).
Thus, JELD-WEN Holding has an ROCE of 7.9%. Ultimately, that's a low return and it under-performs the Building industry average of 14%.
View our latest analysis for JELD-WEN Holding
Above you can see how the current ROCE for JELD-WEN Holding 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 JELD-WEN Holding here for free.
What Can We Tell From JELD-WEN Holding's ROCE Trend?
When we looked at the ROCE trend at JELD-WEN Holding, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.9% from 10% five years ago. 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.
In Conclusion...
While returns have fallen for JELD-WEN Holding 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 46% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for JELD-WEN Holding (of which 1 is significant!) that 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.
