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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at J-Long Group (NASDAQ:JL) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on J-Long Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.033 = US$380k ÷ (US$17m - US$5.3m) (Based on the trailing twelve months to March 2024).
Thus, J-Long Group has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Retail Distributors industry average of 12%.
Check out our latest analysis for J-Long Group
Historical performance is a great place to start when researching a stock so above you can see the gauge for J-Long Group's ROCE against it's prior returns. If you'd like to look at how J-Long Group has performed in the past in other metrics, you can view this free graph of J-Long Group's past earnings, revenue and cash flow.
The Trend Of ROCE
On the surface, the trend of ROCE at J-Long Group doesn't inspire confidence. To be more specific, ROCE has fallen from 25% over the last three years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a side note, J-Long Group has done well to pay down its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. 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.
In Conclusion...
We're a bit apprehensive about J-Long Group 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 93% during the last year. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.