Yahoo Finance How Do JD.com, Inc.’s (NASDAQ:JD) Returns Compare To Its Industry?
Today we'll evaluate JD.com, Inc. (NASDAQ:JD) 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.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
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. 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 JD.com:
0.043 = CN¥5.1b ÷ (CN¥260b - CN¥140b) (Based on the trailing twelve months to December 2019.)
So, JD.com has an ROCE of 4.3%.
Check out our latest analysis for JD.com
Does JD.com Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, JD.com's ROCE appears meaningfully below the 7.0% average reported by the Online Retail industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how JD.com compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.7% available in government bonds. Readers may wish to look for more rewarding investments.
JD.com reported an ROCE of 4.3% -- better than 3 years ago, when the company didn't make a profit. That suggests the business has returned to profitability. You can click on the image below to see (in greater detail) how JD.com's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for JD.com.
JD.com'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.
JD.com has current liabilities of CN¥140b and total assets of CN¥260b. As a result, its current liabilities are equal to approximately 54% of its total assets. Current liabilities of this level result in a meaningful boost to JD.com's ROCE.
Our Take On JD.com's ROCE
, You might be able to find a better investment than JD.com. 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 are like me, then you will not want to miss this free list of growing companies that insiders are 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.
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.
