Today we'll look at John Bean Technologies Corporation (NYSE:JBT) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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.
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for John Bean Technologies:
0.15 = US$207m ÷ (US$1.9b - US$484m) (Based on the trailing twelve months to June 2019.)
Therefore, John Bean Technologies has an ROCE of 15%.
Does John Bean Technologies Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. John Bean Technologies's ROCE appears to be substantially greater than the 12% average in the Machinery 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. Regardless of where John Bean Technologies sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
You can see in the image below how John Bean Technologies's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for John Bean Technologies.
What Are Current Liabilities, And How Do They Affect John Bean Technologies's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
John Bean Technologies has total liabilities of US$484m and total assets of US$1.9b. Therefore its current liabilities are equivalent to approximately 25% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
What We Can Learn From John Bean Technologies's ROCE
With that in mind, John Bean Technologies's ROCE appears pretty good. John Bean Technologies shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
I will like John Bean Technologies better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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