Did you know that there are financial metrics that can provide clues of a potential multi-bagger? First, we would like to identify a growth to return to on capital employed (ROCE) and at the same time, a based capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. So when we looked at the ROCE trend of JB Hi-Fi (ASX:JBH) we really liked what we saw.
Return on capital employed (ROCE): what is it?
If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. To calculate this metric for JB Hi-Fi, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.35 = AU$705 million ÷ (AU$3.8 billion – AU$1.8 billion) (Based on the last twelve months to December 2021).
So, JB Hi-Fi has a ROCE of 35%. In absolute terms, that’s an excellent return and even better than the specialty retail industry average of 20%.
See our latest review for JB Hi-Fi
In the chart above, we measured JB Hi-Fi’s past ROCE against its past performance, but the future is arguably more important. If you want to see what analysts are predicting for the future, you should check out our free report for JB Hi-Fi.
What does the ROCE trend tell us for JB Hi-Fi?
Investors would be thrilled with what’s happening at JB Hi-Fi. Data shows that capital returns have increased significantly over the past five years to 35%. The company is actually making more money per dollar of capital employed, and it’s worth noting that the amount of capital has also increased by 41%. So we’re very inspired by what we’re seeing at JB Hi-Fi with its ability to reinvest capital profitably.
On a separate but related note, it’s important to know that JB Hi-Fi has a current liabilities to total assets ratio of 48%, which we would consider quite high. This may entail certain risks, since the business is essentially dependent on its suppliers or other types of short-term creditors. Ideally, we would like this to decrease, as this would mean fewer risky bonds.
The essential
In summary, JB Hi-Fi has proven that it can reinvest in the business and generate higher returns on that capital employed, which is great. Given that the stock has returned 153% to shareholders over the past five years, it seems investors recognize these changes. That being said, we still think the promising fundamentals mean the company merits further due diligence.
Since virtually every business faces risks, it’s worth knowing about them, and we’ve spotted 2 warning signs for JB Hi-Fi (1 of which is a little worrying!) that you should know about.
If you want to find more stocks that have generated high returns, check out this free list of stocks with strong balance sheets that also generate high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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