Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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 briefly looking over the numbers, we don't think JEP Holdings (Catalist:1J4) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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 JEP Holdings:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = S$4.7m ÷ (S$117m - S$14m) (Based on the trailing twelve months to June 2023).
Therefore, JEP Holdings has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 6.1%.
View our latest analysis for JEP Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for JEP Holdings' ROCE against it's prior returns. If you'd like to look at how JEP Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of JEP Holdings' historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 4.6% and the business has deployed 25% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 12% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
What We Can Learn From JEP Holdings' ROCE
As we've seen above, JEP Holdings' returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 82% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.