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. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed 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.
How Do You Calculate Return On Capital Employed?
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):
0.14 = US$8.2m ÷ (US$67m - US$9.2m) (Based on the trailing twelve months to December 2019.)
So, Jerash Holdings (US) has an ROCE of 14%.
Does Jerash Holdings (US) Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Jerash Holdings (US)'s ROCE appears to be substantially greater than the 11% average in the Luxury industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. 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 14% is lower than 3 years ago, when the company reported a 42% ROCE. This makes us wonder if the business is facing new challenges. You can see in the image below how Jerash Holdings (US)'s ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Jerash Holdings (US).
What Are Current Liabilities, And How Do They Affect Jerash Holdings (US)'s ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Jerash Holdings (US) has current liabilities of US$9.2m and total assets of US$67m. Therefore its current liabilities are equivalent to approximately 14% of its total assets. Low current liabilities are not boosting the ROCE too much.
Our Take On Jerash Holdings (US)'s ROCE
This is good to see, and with a sound ROCE, Jerash Holdings (US) could be worth a closer look. Jerash Holdings (US) shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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