Should You Like Jack Henry & Associates, Inc.’s (NASDAQ:JKHY) High Return On Capital Employed?

Today we are going to look at Jack Henry & Associates, Inc. (NASDAQ:JKHY) to see whether it might be an attractive investment prospect. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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?

The formula for calculating the return on capital employed is:

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

Or for Jack Henry & Associates:

0.20 = US$368m ÷ (US$2.2b – US$343m) (Based on the trailing twelve months to December 2019.)

Therefore, Jack Henry & Associates has an ROCE of 20%.

Check out our latest analysis for Jack Henry & Associates

Does Jack Henry & Associates Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In our analysis, Jack Henry & Associates’s ROCE is meaningfully higher than the 11% average in the IT industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Jack Henry & Associates’s ROCE in absolute terms currently looks quite high.

You can click on the image below to see (in greater detail) how Jack Henry & Associates’s past growth compares to other companies.

NasdaqGS:JKHY Past Revenue and Net Income, March 4th 2020
NasdaqGS:JKHY Past Revenue and Net Income, March 4th 2020

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Jack Henry & Associates.

Jack Henry & Associates’s Current Liabilities And Their Impact On Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Jack Henry & Associates has current liabilities of US$343m and total assets of US$2.2b. As a result, its current liabilities are equal to approximately 16% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.

Our Take On Jack Henry & Associates’s ROCE

With low current liabilities and a high ROCE, Jack Henry & Associates could be worthy of further investigation. Jack Henry & Associates looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

I will like Jack Henry & Associates better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.

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