Here’s what James Hardie Industries’ strong returns on capital mean (ASX: JHX)
If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. 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. Basically, it means that a business has profitable initiatives that it can keep reinvesting in, which is a hallmark of a dialing machine. Ergo, when we looked at the trends in ROCE at James hardie industries (ASX: JHX), we liked what we saw.
What is Return on Employee Capital (ROCE)?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. Analysts use this formula to calculate it for James Hardie Industries:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.20 = $ 685 million ($ 4.0 billion – $ 603 million) (Based on the last twelve months up to June 2021).
Therefore, James Hardie Industries has a ROCE of 20%. In absolute terms, this is a great performance and it’s even better than the basic materials industry average of 8.1%.
See our latest review for James Hardie Industries
In the graph above, we measured James Hardie Industries’ past ROCE against its past performance, but the future is arguably more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for James Hardie Industries.
What does the ROCE trend tell us for James Hardie Industries?
It’s hard not to be impressed by the returns on capital from James Hardie Industries. The company has steadily gained 20% over the past five years and the capital employed within the company has increased by 136% during this period. Now that the ROCE is attractive at 20%, this combination is actually quite attractive because it means that the company can constantly put money to work and generate those high returns. You’ll see this by looking at well-run companies or favorable business models.
On the other hand, James Hardie Industries has done well in reducing current liabilities to 15% of total assets over the past five years. This can eliminate some of the risks inherent in operations, as the company has fewer unpaid obligations to its suppliers and / or short-term creditors than before.
The bottom line
In short, we would say that James Hardie Industries has the makings of a multi-bagger since it has been able to compose its capital at very profitable rates of return. And long-term investors would be delighted with the 166% return they’ve received over the past five years. So while investors seem to recognize these promising trends, we still believe the stock deserves further research.
On a final note, we found 1 warning sign for James Hardie Industries that we think you should be aware of.
High yields are a key ingredient to strong performance, so check out our free list of stocks generating high returns on equity with strong balance sheets.
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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