Stock Analysis

Investors Met With Slowing Returns on Capital At Johnson Health Tech (TPE:1736)

TWSE:1736
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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Johnson Health Tech (TPE:1736) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Johnson Health Tech is:

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

0.064 = NT$982m ÷ (NT$31b - NT$16b) (Based on the trailing twelve months to December 2020).

Thus, Johnson Health Tech has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Leisure industry average of 12%.

View our latest analysis for Johnson Health Tech

roce
TSEC:1736 Return on Capital Employed March 28th 2021

In the above chart we have measured Johnson Health Tech's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Johnson Health Tech.

So How Is Johnson Health Tech's ROCE Trending?

There are better returns on capital out there than what we're seeing at Johnson Health Tech. The company has consistently earned 6.4% for the last five years, and the capital employed within the business has risen 51% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Another thing to note, Johnson Health Tech has a high ratio of current liabilities to total assets of 51%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Johnson Health Tech's ROCE

In summary, Johnson Health Tech has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 74% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing, we've spotted 2 warning signs facing Johnson Health Tech that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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. 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.
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