Investors Could Be Concerned With JE Cleantech Holdings' (NASDAQ:JCSE) Returns On Capital

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at JE Cleantech Holdings (NASDAQ:JCSE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for JE Cleantech Holdings:

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

0.087 = S$1.9m ÷ (S$35m - S$13m) (Based on the trailing twelve months to June 2023).

So, JE Cleantech Holdings has an ROCE of 8.7%. Ultimately, that's a low return and it under-performs the Machinery industry average of 13%.

Check out our latest analysis for JE Cleantech Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how JE Cleantech Holdings has performed in the past in other metrics, you can view this free graph of JE Cleantech Holdings' past earnings, revenue and cash flow.

What Can We Tell From JE Cleantech Holdings' ROCE Trend?

On the surface, the trend of ROCE at JE Cleantech Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 25% over the last three years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that JE Cleantech Holdings is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 54% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to know some of the risks facing JE Cleantech Holdings we've found 3 warning signs (2 can't be ignored!) that you should be aware of before investing here.

While JE Cleantech Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.