If we are to find multi-bagger potential, there are often underlying trends that can provide clues. Ideally, a business will display two trends; first growth return on capital employed (ROCE) and on the other hand, an increase amount capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked through our eyes James Hardie Industries’ (ASX: JHX) trend of ROCE, we liked what we saw.
Return on capital employed (ROCE): what is it?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for James Hardie Industries, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.20 = US $ 630 million ÷ (US $ 4.1 billion – US $ 901 million) (Based on the last twelve months up to March 2021).
So, James Hardie Industries has a ROCE of 20%. In absolute terms, this is a satisfactory performance, but compared to the basic materials industry average of 7.3%, it is much better.
Above you can see how James Hardie Industries’ current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you are interested, you can view analyst forecasts in our free business analyst forecast report.
The ROCE trend
While the returns on capital are good, they haven’t budged much. Over the past five years, ROCE has remained relatively stable at around 20% and the company has deployed 96% more capital in its operations. Since 20% is moderate ROCE, it’s good to see that a company can keep reinvesting at these decent rates of return. Over long periods of time, returns like these may not be very exciting, but with consistency, they can be profitable in terms of stock price performance.
The final result on the ROCE of James Hardie Industries
In short, James Hardie Industries has simply reinvested capital regularly, at these decent rates of return. And the stock has performed incredibly well with a return of 125% over the past five years, so long-term investors are no doubt delighted with the result. So while the stock may be “more expensive” than it used to be, we believe that the strong fundamentals warrant further research into this stock.
If you are interested in knowing the risks faced by James Hardie Industries, we have discovered 1 warning sign of which you should be aware.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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