Companies are bought for different reasons by investors. From stocks are used for their potential price increase over time, dividends, to high volatility stocks used to generate profits for traders. There are also stocks that are important, stable, well managed, and can be used for another reason: to reduce risk or to diversify a portfolio. As long as they are not grossly overvalued, these stocks can prove useful in times of uncertainty.
How do we find these companies and what to look for? It’s always a good idea to consider the whole picture when looking at a stock, and today we’ll start by looking at the performance measurement of a large and stable stock.
First, we will want to see a return on capital employed (ROCE) which increases and, on the other hand, a based capital employed. These types of businesses continually reinvest their profits at ever higher rates of return.
When we looked Johnson & johnson (NYSE: JNJ) this looks mediocre at first glance, but further digging shows investors may find stability and reliability more important than the outlook for growth.
What is Return on Employee Capital (ROCE)?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. Analysts use this formula to calculate it for Johnson & Johnson:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.16 = US $ 21 billion ÷ (US $ 173 billion – US $ 41 billion) (Based on the last twelve months up to April 2021).
Therefore, Johnson & Johnson has a ROCE of 16%. By itself this is a standard return, but it is much better than the 13% generated by the Pharmacy industry.
Check out our latest review for Johnson & Johnson
Above you can see how Johnson & Johnson’s current ROCE compares to its previous returns on equity, but there isn’t much you can say about the past.
The important thing to note about ROCE is that it encompasses a return based on both equity and debt. The high and positive values indicate that JNJ is effectively managing its high debt of $ 33.6 billion.
While some investors may be caught off guard, high leverage is a feature and not a bug of large mature companies, and the returns provided by debt and equity are reassuring.
If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
What can we say about Johnson & Johnson’s ROCE trend?
There hasn’t been much to report on Johnson & Johnson’s returns and level of capital employed, as both measures have remained stable over the past five years.
The company appears to deem its performance satisfactory, as it has kept it stable while paying a stable and growing dividend of US $ 4.04 per share. It’s not uncommon to see this when looking at a mature, stable company that isn’t reinvesting its profits because it’s likely past that phase of the business cycle.
With fewer investment opportunities, it makes sense that Johnson & Johnson would pay 42% of its profits to its shareholders. Since the company does not reinvest in itself, it makes sense to distribute a portion of the profits among the shareholders.
What we can learn from Johnson & Johnson’s ROCE
Johnson & Johnson was provide stable returns the same amount of capital over the past five years.
The company is an international business mogul, with a rich and diverse product portfolio and a globally recognized brand. This gives it flexibility in deploying new products, adjusting to market conditions and pricing power over inflation.
For these reasons, it looks like Johnson & Johnson is giving investors the option to include a slow-growing but stable stock, which could reduce the risk of portfolios that are too focused on growth stocks.
Johnson & Johnson carries some risk, and we have spotted 1 warning sign for Johnson & Johnson that might interest you.
While Johnson & Johnson does not currently achieve the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This 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 documents.
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