If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Jerash Holdings (US) (NASDAQ:JRSH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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 Jerash Holdings (US), this is the formula:

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

0.0076 = US$525k ÷ (US$78m - US$8.9m) (Based on the trailing twelve months to December 2023).

So, Jerash Holdings (US) has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Luxury industry average of 12%.

See our latest analysis for Jerash Holdings (US)

Above you can see how the current ROCE for Jerash Holdings (US) compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Jerash Holdings (US) .

How Are Returns Trending?

On the surface, the trend of ROCE at Jerash Holdings (US) doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 0.8%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

What We Can Learn From Jerash Holdings (US)'s ROCE

In summary, we're somewhat concerned by Jerash Holdings (US)'s diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 47% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 2 warning signs with Jerash Holdings (US) and understanding these should be part of your investment process.

While Jerash Holdings (US) 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.

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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.