EMS firms with higher ROCE may command premium valuations: JP Morgan
AI Summary
As investors shift their focus to return on capital employed (ROCE) in the EMS sector, retail investors should be cautious about the current high P/E valuations that may not be justified by underlying ROCE metrics. This trend highlights the importance of scrutinizing balance sheets and cash flows, especially as growth expectations moderate and working capital pressures increase. For those looking to invest in EMS stocks, prioritizing companies with strong ROCE could lead to more sustainable investment choices amidst potential market corrections.
Investors could increasingly look beyond earnings growth to return on capital employed (ROCE) while valuing electronics manufacturing services (EMS) companies, as firms with similar earnings growth but higher ROCE could command premium valuations according to a report by JP Morgan.
Strong revenue growth has driven a re-rating in price-to-earnings (P/E) multiples across the electronics manufacturing services (EMS) sector in recent years. However, the report noted that “one cannot ignore the ROCE of the business, given its capex-intensive and high-NWC (net working capital) nature and, hence, it has to be baked into the multiples as well.”
Original Article
Published on Hindu BusinessLine
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