If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. That’s why when we briefly looked at Jabil’s (NYSE:JBL) ROCE trend, we were pretty happy with what we saw.
Return On Capital Employed (ROCE): What is it?
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Jabil, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.17 = US$971m ÷ (US$14b – US$8.8b) (Based on the trailing twelve months to February 2021).
Thus, Jabil has an ROCE of 17%. On its own, that’s a standard return, however it’s much better than the 11% generated by the Electronic industry.
Above you can see how the current ROCE for Jabil compares to its prior returns on capital, but there’s only so much you can tell from the past.
What Can We Tell From Jabil’s ROCE Trend?
While the current returns on capital are decent, they haven’t changed much. Over the past five years, ROCE has remained relatively flat at around 17% and the business has deployed 25% more capital into its operations. Since 17% is a moderate ROCE though, it’s good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
On a side note, Jabil’s current liabilities are still rather high at 61% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
The main thing to remember is that Jabil has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 228% return they’ve received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
Jabil does have some risks though, and we’ve spotted 3 warning signs for Jabil that you might be interested in.
While Jabil may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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