Why Jamieson Wellness Inc.’s (TSE:JWEL) Use Of Investor Capital Doesn’t Look Great

Today we are going to look at Jamieson Wellness Inc. (TSE:JWEL) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for Jamieson Wellness:

0.11 = CA$51m ÷ (CA$555m - CA$86m) (Based on the trailing twelve months to June 2019.)

So, Jamieson Wellness has an ROCE of 11%.

View our latest analysis for Jamieson Wellness

Is Jamieson Wellness's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Jamieson Wellness's ROCE appears meaningfully below the 17% average reported by the Personal Products industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Jamieson Wellness compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

We can see that, Jamieson Wellness currently has an ROCE of 11% compared to its ROCE 3 years ago, which was 8.2%. This makes us think about whether the company has been reinvesting shrewdly.

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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect Jamieson Wellness's ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Jamieson Wellness has total assets of CA$555m and current liabilities of CA$86m. As a result, its current liabilities are equal to approximately 15% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

Our Take On Jamieson Wellness's ROCE

This is good to see, and with a sound ROCE, Jamieson Wellness could be worth a closer look. Jamieson Wellness looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.