What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Jabil (NYSE:JBL) looks great, so lets see what the trend can tell us.
Understanding Return On Capital Employed (ROCE)
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 Jabil is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = US$1.5b ÷ (US$17b - US$11b) (Based on the trailing twelve months to May 2024).
Thus, Jabil has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Electronic industry average of 9.7%.
Above you can see how the current ROCE for Jabil compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Jabil .
What The Trend Of ROCE Can Tell Us
Jabil is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 25%. The amount of capital employed has increased too, by 27%. So we're very much inspired by what we're seeing at Jabil thanks to its ability to profitably reinvest capital.
On a side note, Jabil's current liabilities are still rather high at 65% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
In Conclusion...
In summary, it's great to see that Jabil can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 229% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Jabil can keep these trends up, it could have a bright future ahead.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Jabil (of which 1 is a bit unpleasant!) that you should know about.
Jabil is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.