What Can We Learn From Juniper Networks, Inc.’s (NYSE:JNPR) Investment Returns?

Today we’ll evaluate Juniper Networks, Inc. (NYSE:JNPR) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.

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

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’

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 Juniper Networks:

0.077 = US$588m ÷ (US$9.1b – US$1.5b) (Based on the trailing twelve months to March 2019.)

So, Juniper Networks has an ROCE of 7.7%.

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Does Juniper Networks Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, Juniper Networks’s ROCE appears to be around the 7.9% average of the Communications industry. Aside from the industry comparison, Juniper Networks’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

As we can see, Juniper Networks currently has an ROCE of 7.7%, less than the 13% it reported 3 years ago. This makes us wonder if the business is facing new challenges.

NYSE:JNPR Past Revenue and Net Income, May 16th 2019
NYSE:JNPR Past Revenue and Net Income, May 16th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Juniper Networks’s Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Juniper Networks has total liabilities of US$1.5b and total assets of US$9.1b. Therefore its current liabilities are equivalent to approximately 16% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

What We Can Learn From Juniper Networks’s ROCE

If Juniper Networks continues to earn an uninspiring ROCE, there may be better places to invest. You might be able to find a better investment than Juniper Networks. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.