Today we are going to look at Jack Henry & Associates, Inc. (NASDAQ:JKHY) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Jack Henry & Associates:
0.20 = US$347m ÷ (US$2.2b - US$470m) (Based on the trailing twelve months to June 2019.)
So, Jack Henry & Associates has an ROCE of 20%.
Is Jack Henry & Associates's ROCE Good?
One way to assess ROCE is to compare similar companies. Jack Henry & Associates's ROCE appears to be substantially greater than the 10% average in the IT industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Jack Henry & Associates's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
The image below shows how Jack Henry & Associates's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Jack Henry & Associates.
Jack Henry & Associates's Current Liabilities And Their Impact On Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Jack Henry & Associates has total assets of US$2.2b and current liabilities of US$470m. Therefore its current liabilities are equivalent to approximately 22% of its total assets. Low current liabilities are not boosting the ROCE too much.
Our Take On Jack Henry & Associates's ROCE
Overall, Jack Henry & Associates has a decent ROCE and could be worthy of further research. There might be better investments than Jack Henry & Associates out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
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