Advertisement
U.S. markets close in 2 hours 41 minutes
  • S&P 500

    5,250.00
    +1.51 (+0.03%)
     
  • Dow 30

    39,753.72
    -6.36 (-0.02%)
     
  • Nasdaq

    16,372.33
    -27.19 (-0.17%)
     
  • Russell 2000

    2,126.92
    +12.57 (+0.59%)
     
  • Crude Oil

    82.83
    +1.48 (+1.82%)
     
  • Gold

    2,243.80
    +31.10 (+1.41%)
     
  • Silver

    25.00
    +0.25 (+1.00%)
     
  • EUR/USD

    1.0800
    -0.0029 (-0.27%)
     
  • 10-Yr Bond

    4.2000
    +0.0040 (+0.10%)
     
  • GBP/USD

    1.2628
    -0.0010 (-0.08%)
     
  • USD/JPY

    151.3530
    +0.1070 (+0.07%)
     
  • Bitcoin USD

    70,593.01
    +1,273.70 (+1.84%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,952.62
    +20.64 (+0.26%)
     
  • Nikkei 225

    40,168.07
    -594.66 (-1.46%)
     

Here’s What Johnson Electric Holdings Limited’s (HKG:179) ROCE Can Tell Us

Today we’ll evaluate Johnson Electric Holdings Limited (HKG:179) to determine whether it could have potential as an investment idea. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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?

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 Johnson Electric Holdings:

0.099 = US$316m ÷ (US$4.0b – US$1.1b) (Based on the trailing twelve months to September 2018.)

Therefore, Johnson Electric Holdings has an ROCE of 9.9%.

Check out our latest analysis for Johnson Electric Holdings

Want to participate in a short research study? Help shape the future of investing tools and receive a $60 prize!

Does Johnson Electric Holdings Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Johnson Electric Holdings’s ROCE appears to be substantially greater than the 7.0% average in the Electrical industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Aside from the industry comparison, Johnson Electric Holdings’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

SEHK:179 Last Perf January 29th 19
SEHK:179 Last Perf January 29th 19

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 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 Johnson Electric Holdings.

What Are Current Liabilities, And How Do They Affect Johnson Electric Holdings’s ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Johnson Electric Holdings has total liabilities of US$1.1b and total assets of US$4.0b. As a result, its current liabilities are equal to approximately 28% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

Our Take On Johnson Electric Holdings’s ROCE

That said, Johnson Electric Holdings’s ROCE is mediocre, there may be more attractive investments around. But note: Johnson Electric Holdings may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Advertisement