Returns On Capital At James Hardie Industries (ASX:JHX) Paint An Interesting Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at James Hardie Industries (ASX:JHX), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for James Hardie Industries, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.17 = US$578m ÷ (US$4.5b - US$1.0b) (Based on the trailing twelve months to December 2020).

So, James Hardie Industries has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Basic Materials industry average of 7.3% it's much better.

See our latest analysis for James Hardie Industries

Above you can see how the current ROCE for James Hardie Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for James Hardie Industries.

The Trend Of ROCE

In terms of James Hardie Industries' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 17% from 22% five years ago. However it looks like James Hardie Industries might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that James Hardie Industries is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 132% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing to note, we've identified 3 warning signs with James Hardie Industries and understanding these should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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