Yahoo Finance Why We Like James Halstead plc’s (LON:JHD) 31% Return On Capital Employed
Today we are going to look at James Halstead plc (LON:JHD) 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. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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?
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 James Halstead:
0.31 = UK£48m ÷ (UK£216m - UK£62m) (Based on the trailing twelve months to June 2019.)
So, James Halstead has an ROCE of 31%.
Check out our latest analysis for James Halstead
Is James Halstead's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. James Halstead's ROCE appears to be substantially greater than the 10% average in the Building industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, James Halstead's ROCE is currently very good.
The image below shows how James Halstead'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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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.
What Are Current Liabilities, And How Do They Affect James Halstead's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
James Halstead has total liabilities of UK£62m and total assets of UK£216m. Therefore its current liabilities are equivalent to approximately 29% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.
The Bottom Line On James Halstead's ROCE
This is good to see, and with such a high ROCE, James Halstead may be worth a closer look. There might be better investments than James Halstead 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
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