Returns on capital show encouraging signs at Johnson Electric Holdings (HKG: 179)
To find multi-bagger stock, what are the underlying trends we need to look for in a business? Ideally, a business will display two trends; first growth to recover on capital employed (ROCE) and on the other hand, an increase amount capital employed. This shows us that it is a composing machine, capable of continually reinvesting its profits in the business and generating higher returns. So when we looked Johnson Electric Holdings (HKG: 179) and its trend of ROCE, we really liked what we saw.
Understanding Return on Capital Employed (ROCE)
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. To calculate this metric for Johnson Electric Holdings, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.084 = $ 258 million ÷ ($ 4.0 billion – $ 959 million) (Based on the last twelve months up to March 2021).
Therefore, Johnson Electric Holdings has a ROCE of 8.4%. In absolute terms, that’s a poor performance, but it’s far better than the auto components industry average of 6.2%.
Check out our latest analysis for Johnson Electric Holdings
Above you can see how Johnson Electric Holdings’ current ROCE compares to its previous returns on equity, but there is little you can say about the past. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
What can we say about the ROCE trend of Johnson Electric Holdings?
While in absolute terms it’s not a high ROCE, it is promising to see that it has moved in the right direction. The figures show that over the past five years, the returns generated on capital employed have increased significantly to 8.4%. The company actually makes more money per dollar of capital employed, and it should be noted that the amount of capital has also increased, by 23%. This may indicate that there are many opportunities to invest capital internally and at increasingly higher rates, a common combination among multi-baggers.
The key to take away
A business that increases its returns on capital and can constantly reinvest in itself is a highly desirable trait, and that’s what Johnson Electric Holdings has. And given that the stock has remained fairly stable over the past five years, there could be an opportunity here if other metrics are strong. However, research into current valuation metrics and the company’s future prospects seems appropriate.
One more thing, we spotted 2 warning signs opposite Johnson Electric Holdings which you might find interesting.
While Johnson Electric Holdings does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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