What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at John Bean Technologies (NYSE:JBT) and its ROCE trend, we weren’t exactly thrilled.
Understanding Return On Capital Employed (ROCE)
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for John Bean Technologies:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.14 = US$199m ÷ (US$1.8b – US$412m) (Based on the trailing twelve months to June 2020).
Thus, John Bean Technologies has an ROCE of 14%. In absolute terms, that’s a satisfactory return, but compared to the Machinery industry average of 9.1% it’s much better.
In the above chart we have measured John Bean Technologies’ prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering John Bean Technologies here for free.
So How Is John Bean Technologies’ ROCE Trending?
On the surface, the trend of ROCE at John Bean Technologies doesn’t inspire confidence. Around five years ago the returns on capital were 23%, but since then they’ve fallen to 14%. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.On a related note, John Bean Technologies has decreased its current liabilities to 23% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it’s own money, you could argue this has made the business less efficient at generating ROCE.
In summary, John Bean Technologies is reinvesting funds back into the business for growth but unfortunately it looks like sales haven’t increased much just yet. Investors must think there’s better things to come because the stock has knocked it out of the park delivering a 204% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn’t get our hopes up too high.
If you’d like to know about the risks facing John Bean Technologies, we’ve discovered 2 warning signs that you should be aware of.
While John Bean Technologies may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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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