Johnson Electric Holdings' (HKG:179) Returns On Capital Not Reflecting Well On The Business

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Johnson Electric Holdings (HKG:179), the trends above didn't look too great.

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. The formula for this calculation on Johnson Electric Holdings is:

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

0.058 = US$180m ÷ (US$4.1b - US$981m) (Based on the trailing twelve months to March 2023).

Therefore, Johnson Electric Holdings has an ROCE of 5.8%. In absolute terms, that's a low return but it's around the Auto Components industry average of 4.9%.

See our latest analysis for Johnson Electric Holdings

Above you can see how the current ROCE for Johnson Electric Holdings 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 Johnson Electric Holdings.

How Are Returns Trending?

In terms of Johnson Electric Holdings' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 10% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Johnson Electric Holdings to turn into a multi-bagger.

Our Take On Johnson Electric Holdings' ROCE

In summary, it's unfortunate that Johnson Electric Holdings is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 44% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 2 warning signs for Johnson Electric Holdings that we think you should be aware of.

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.