Today we’ll evaluate JLT Mobile Computers AB (publ) (STO:JLT) to determine whether it could have potential as an investment idea. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its 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 measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for JLT Mobile Computers:
0.23 = kr14m ÷ (kr97m – kr37m) (Based on the trailing twelve months to December 2019.)
Therefore, JLT Mobile Computers has an ROCE of 23%.
Is JLT Mobile Computers’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. JLT Mobile Computers’s ROCE appears to be substantially greater than the 12% average in the Tech 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. Putting aside its position relative to its industry for now, in absolute terms, JLT Mobile Computers’s ROCE is currently very good.
The image below shows how JLT Mobile Computers’s ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is 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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for JLT Mobile Computers.
Do JLT Mobile Computers’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.
JLT Mobile Computers has current liabilities of kr37m and total assets of kr97m. As a result, its current liabilities are equal to approximately 38% of its total assets. JLT Mobile Computers has a medium level of current liabilities, boosting its ROCE somewhat.
What We Can Learn From JLT Mobile Computers’s ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. There might be better investments than JLT Mobile Computers out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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