Investors Should Be Encouraged By JB Hi-Fi's (ASX:JBH) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in JB Hi-Fi's (ASX:JBH) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for JB Hi-Fi:

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

0.32 = AU$677m ÷ (AU$3.7b - AU$1.6b) (Based on the trailing twelve months to December 2023).

Therefore, JB Hi-Fi has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 18%.

See our latest analysis for JB Hi-Fi

Above you can see how the current ROCE for JB Hi-Fi 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 analyst report for JB Hi-Fi .

So How Is JB Hi-Fi's ROCE Trending?

We like the trends that we're seeing from JB Hi-Fi. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 32%. The amount of capital employed has increased too, by 40%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that JB Hi-Fi has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On JB Hi-Fi's ROCE

All in all, it's terrific to see that JB Hi-Fi is reaping the rewards from prior investments and is growing its capital base. And a remarkable 240% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for JB Hi-Fi (of which 1 makes us a bit uncomfortable!) that you should know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.