The Returns At Johnson Electric Holdings (HKG:179) Aren't Growing

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Having said that, from a first glance at Johnson Electric Holdings (HKG:179) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Johnson Electric Holdings, this is the formula:

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).

So, Johnson Electric Holdings has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 7.5% it's much better.

Check out 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 report on analyst forecasts for the company.

So How Is Johnson Electric Holdings' ROCE Trending?

There hasn't been much to report for Johnson Electric Holdings' returns and its level of capital employed because both metrics have been steady for the past 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. With that in mind, unless investment picks up again in the future, we wouldn't expect Johnson Electric Holdings to be a multi-bagger going forward.

The Key Takeaway

In a nutshell, Johnson Electric Holdings has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 31% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Johnson Electric Holdings has the makings of a multi-bagger.

One more thing, we've spotted 1 warning sign facing Johnson Electric Holdings that you might find interesting.

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.