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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in JB Hi-Fi's (ASX:JBH) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on JB Hi-Fi is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.30 = AU$645m ÷ (AU$3.5b - AU$1.3b) (Based on the trailing twelve months to June 2024).
Thus, JB Hi-Fi has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.
View our latest analysis for JB Hi-Fi
Above you can see how the current ROCE for JB Hi-Fi compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering JB Hi-Fi for free.
What Can We Tell From JB Hi-Fi's ROCE Trend?
Investors would be pleased with what's happening at JB Hi-Fi. The data shows that returns on capital have increased substantially over the last five years to 30%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 34%. So we're very much inspired by what we're seeing at JB Hi-Fi thanks to its ability to profitably reinvest capital.
Our Take On JB Hi-Fi's ROCE
To sum it up, JB Hi-Fi has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 229% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if JB Hi-Fi can keep these trends up, it could have a bright future ahead.
On a final note, we've found 1 warning sign for JB Hi-Fi that we think you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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.