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Be Wary Of Jerash Holdings (US) (NASDAQ:JRSH) And Its Returns On Capital

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  • JRSH

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Jerash Holdings (US) (NASDAQ:JRSH), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. Analysts use this formula to calculate it for Jerash Holdings (US):

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.092 = US$5.4m ÷ (US$73m - US$15m) (Based on the trailing twelve months to March 2021).

Therefore, Jerash Holdings (US) has an ROCE of 9.2%. On its own, that's a low figure but it's around the 10% average generated by the Luxury industry.

See our latest analysis for Jerash Holdings (US)

roce
roce

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 to see what analysts are forecasting going forward, you should check out our free report for Jerash Holdings (US).

What Can We Tell From Jerash Holdings (US)'s ROCE Trend?

In terms of Jerash Holdings (US)'s historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.2% from 54% five years ago. 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.

On a related note, Jerash Holdings (US) has decreased its current liabilities to 20% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

To conclude, we've found that Jerash Holdings (US) is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 23% over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Jerash Holdings (US) (of which 1 is a bit concerning!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.