Yahoo Finance Returns On Capital Signal Difficult Times Ahead For J. Smart (Contractors) (LON:SMJ)
What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within J. Smart (Contractors) (LON:SMJ), we weren't too hopeful.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for J. Smart (Contractors), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.017 = UK£1.7m ÷ (UK£117m - UK£15m) (Based on the trailing twelve months to January 2021).
Therefore, J. Smart (Contractors) has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 8.2%.
View our latest analysis for J. Smart (Contractors)
Historical performance is a great place to start when researching a stock so above you can see the gauge for J. Smart (Contractors)'s ROCE against it's prior returns. If you'd like to look at how J. Smart (Contractors) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From J. Smart (Contractors)'s ROCE Trend?
We are a bit worried about the trend of returns on capital at J. Smart (Contractors). Unfortunately the returns on capital have diminished from the 2.6% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on J. Smart (Contractors) becoming one if things continue as they have.
What We Can Learn From J. Smart (Contractors)'s ROCE
In summary, it's unfortunate that J. Smart (Contractors) is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 43% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
Like most companies, J. Smart (Contractors) does come with some risks, and we've found 2 warning signs that you should be aware of.
While J. Smart (Contractors) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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.
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