Stock Analysis

Returns On Capital Are A Standout For JB Hi-Fi (ASX:JBH)

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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of JB Hi-Fi (ASX:JBH) we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for JB Hi-Fi, this is the formula:

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

0.35 = AU$705m ÷ (AU$3.8b - AU$1.8b) (Based on the trailing twelve months to December 2021).

So, JB Hi-Fi has an ROCE of 35%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 20%.

See our latest analysis for JB Hi-Fi

ASX:JBH Return on Capital Employed February 16th 2022

In the above chart we have measured JB Hi-Fi's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for JB Hi-Fi.

What Does the ROCE Trend For JB Hi-Fi Tell Us?

Investors would be pleased with what's happening at JB Hi-Fi. The data shows that returns on capital have increased substantially over the last five years to 35%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 41%. So we're very much inspired by what we're seeing at JB Hi-Fi thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that JB Hi-Fi has a current liabilities to total assets ratio of 48%, 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.

The Bottom Line

To sum it up, JB Hi-Fi has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 153% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

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 is a bit concerning!) that you should know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

Valuation is complex, but we're helping make it simple.

Find out whether JB Hi-Fi is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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