Yahoo Finance Why JEMTEC Inc.’s (CVE:JTC) Return On Capital Employed Is Impressive
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.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect 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. Overall, it is a valuable metric that has its flaws. 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 JEMTEC:
0.29 = CA$584k ÷ (CA$2.5m - CA$440k) (Based on the trailing twelve months to April 2019.)
Therefore, JEMTEC has an ROCE of 29%.
Check out our latest analysis for JEMTEC
Is JEMTEC's ROCE Good?
One way to assess ROCE is to compare similar companies. In our analysis, JEMTEC's ROCE is meaningfully higher than the 16% average in the Electronic 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, JEMTEC's ROCE in absolute terms currently looks quite high.
JEMTEC reported an ROCE of 29% -- better than 3 years ago, when the company didn't make a profit. That implies the business has been improving. The image below shows how JEMTEC's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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. If JEMTEC is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
JEMTEC'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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
JEMTEC has total liabilities of CA$440k and total assets of CA$2.5m. As a result, its current liabilities are equal to approximately 18% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.
Our Take On JEMTEC's ROCE
This is good to see, and with such a high ROCE, JEMTEC may be worth a closer look. JEMTEC 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.
If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.
