Will Johnson Electric Holdings (HKG:179) Multiply In Value Going Forward?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. 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.

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

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. Analysts use this formula to calculate it for Johnson Electric Holdings:

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

0.084 = US$238m ÷ (US$3.6b - US$799m) (Based on the trailing twelve months to September 2020).

Thus, Johnson Electric Holdings has an ROCE of 8.4%. In absolute terms, that's a low return but it's around the Auto Components industry average of 9.5%.

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 report on analyst forecasts for the company.

What Does the ROCE Trend For Johnson Electric Holdings Tell Us?

There are better returns on capital out there than what we're seeing at Johnson Electric Holdings. The company has consistently earned 8.4% for the last five years, and the capital employed within the business has risen 24% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On Johnson Electric Holdings' ROCE

In summary, Johnson Electric Holdings has simply been reinvesting capital and generating the same low rate of return as before. And investors may be recognizing these trends since the stock has only returned a total of 21% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a separate note, we've found 1 warning sign for Johnson Electric Holdings you'll probably want to know about.

While Johnson Electric Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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