Here's What To Make Of Johnson Electric Holdings' (HKG:179) Decelerating Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Johnson Electric Holdings (HKG:179) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Johnson Electric Holdings is:

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

0.11 = US$300m ÷ (US$4.0b - US$1.2b) (Based on the trailing twelve months to September 2023).

Thus, Johnson Electric Holdings has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.4% generated by the Auto Components industry.

See our latest analysis for Johnson Electric Holdings

In the above chart we have measured Johnson Electric Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Johnson Electric Holdings .

What Can We Tell From Johnson Electric Holdings' ROCE Trend?

Things have been pretty stable at Johnson Electric Holdings, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Johnson Electric Holdings doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that Johnson Electric Holdings has been paying out a decent 34% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

What We Can Learn From Johnson Electric Holdings' ROCE

In summary, Johnson Electric Holdings isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 23% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Johnson Electric Holdings does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.