What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. And in light of that, the trends we're seeing at Jewett-Cameron Trading's (NASDAQ:JCTC.F) look very promising so lets take a look.

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. To calculate this metric for Jewett-Cameron Trading, this is the formula:

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

0.23 = US$4.6m ÷ (US$23m - US$3.2m) (Based on the trailing twelve months to February 2021).

Thus, Jewett-Cameron Trading has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Building industry average of 13%.

Check out our latest analysis for Jewett-Cameron Trading

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jewett-Cameron Trading's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Jewett-Cameron Trading, check out these free graphs here.

So How Is Jewett-Cameron Trading's ROCE Trending?

Jewett-Cameron Trading is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 32% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Key Takeaway

In summary, we're delighted to see that Jewett-Cameron Trading has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 71% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One final note, you should learn about the 2 warning signs we've spotted with Jewett-Cameron Trading (including 1 which is a bit concerning) .

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

This article by Simply Wall St is general in nature. 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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