Yahoo Finance Is Johnson Service Group (LON:JSG) Likely To Turn Things Around?
There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Johnson Service Group (LON:JSG) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Johnson Service Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = UK£9.9m ÷ (UK£405m - UK£79m) (Based on the trailing twelve months to June 2020).
Therefore, Johnson Service Group has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 10%.
See our latest analysis for Johnson Service Group
In the above chart we have measured Johnson Service Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Johnson Service Group here for free.
How Are Returns Trending?
Unfortunately, the trend isn't great with ROCE falling from 11% five years ago, while capital employed has grown 64%. Usually this isn't ideal, but given Johnson Service Group conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Johnson Service Group's earnings and if they change as a result from the capital raise.
In Conclusion...
In summary, we're somewhat concerned by Johnson Service Group's diminishing returns on increasing amounts of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 53% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
On a separate note, we've found 3 warning signs for Johnson Service Group you'll probably want to know about.
While Johnson Service Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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