If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Ergo, when we looked at the ROCE trends at Jack Henry & Associates (NASDAQ:JKHY), we liked what we saw.
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 Jack Henry & Associates:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = US$482m ÷ (US$2.6b - US$470m) (Based on the trailing twelve months to September 2022).
Therefore, Jack Henry & Associates has an ROCE of 23%. In absolute terms that's a great return and it's even better than the IT industry average of 12%.
Above you can see how the current ROCE for Jack Henry & Associates 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 report on analyst forecasts for the company.
How Are Returns Trending?
It's hard not to be impressed by Jack Henry & Associates' returns on capital. Over the past five years, ROCE has remained relatively flat at around 23% and the business has deployed 53% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Jack Henry & Associates can keep this up, we'd be very optimistic about its future.
The Bottom Line On Jack Henry & Associates' ROCE
In short, we'd argue Jack Henry & Associates has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
Jack Henry & Associates does have some risks though, and we've spotted 1 warning sign for Jack Henry & Associates that you might be interested in.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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