Yahoo Finance JEMTEC Inc. (CVE:JTC) Is Employing Capital Very Effectively
Today we are going to look at JEMTEC Inc. (CVE:JTC) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First up, we'll look at what ROCE is and how we calculate it. 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 is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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'.
So, How Do We Calculate ROCE?
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 JEMTEC:
0.31 = CA$531k ÷ (CA$2.8m - CA$1.1m) (Based on the trailing twelve months to January 2020.)
So, JEMTEC has an ROCE of 31%.
View our latest analysis for JEMTEC
Is JEMTEC's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that JEMTEC's ROCE is meaningfully better than the 7.2% average in the Electronic industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, JEMTEC's ROCE in absolute terms currently looks quite high.
JEMTEC has an ROCE of 31%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving. You can see in the image below how JEMTEC's ROCE compares to its industry. Click to see more on past growth.
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. ROCE is only a point-in-time measure. If JEMTEC is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do JEMTEC's Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
JEMTEC has current liabilities of CA$1.1m and total assets of CA$2.8m. As a result, its current liabilities are equal to approximately 38% of its total assets. A medium level of current liabilities boosts JEMTEC's ROCE somewhat.
Our Take On JEMTEC's ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. There might be better investments than JEMTEC out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
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. Thank you for reading.
