Is Jacobs Engineering Group Inc. (NYSE:JEC) Creating Value For Shareholders?

Today we are going to look at Jacobs Engineering Group Inc. (NYSE:JEC) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

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

Or for Jacobs Engineering Group:

0.077 = US$760m ÷ (US$13b - US$3.1b) (Based on the trailing twelve months to December 2018.)

Therefore, Jacobs Engineering Group has an ROCE of 7.7%.

View our latest analysis for Jacobs Engineering Group

Is Jacobs Engineering Group's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that Jacobs Engineering Group's ROCE is fairly close to the Construction industry average of 9.6%. Setting aside the industry comparison for now, Jacobs Engineering Group's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our freereport on analyst forecasts for Jacobs Engineering Group.

Do Jacobs Engineering Group's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

Jacobs Engineering Group has total liabilities of US$3.1b and total assets of US$13b. Therefore its current liabilities are equivalent to approximately 24% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

The Bottom Line On Jacobs Engineering Group's ROCE

With that in mind, we're not overly impressed with Jacobs Engineering Group's ROCE, so it may not be the most appealing prospect. You might be able to find a better buy than Jacobs Engineering Group. If you want a selection of possible winners, check out this freelist of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

I will like Jacobs Engineering Group better if I see some big insider buys. While we wait, check out this freelist of growing companies with considerable, recent, insider buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.