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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at James Cropper (LON:CRPR) and its ROCE trend, we weren't exactly thrilled.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for James Cropper:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = UK£1.7m ÷ (UK£86m - UK£17m) (Based on the trailing twelve months to March 2024).
Thus, James Cropper has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 9.1%.
View our latest analysis for James Cropper
Above you can see how the current ROCE for James Cropper 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 analyst report for James Cropper .
The Trend Of ROCE
In terms of James Cropper's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 5.4%, but since then they've fallen to 2.5%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
The Bottom Line On James Cropper's ROCE
We're a bit apprehensive about James Cropper because despite more capital being deployed in the business, returns on that capital and sales have both fallen. We expect this has contributed to the stock plummeting 76% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you want to know some of the risks facing James Cropper we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.
While James Cropper isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.