Global investment bank highlights shift toward capital efficiency as elevated working capital and heavy capex threaten cash generation.
Investors are increasingly expected to look beyond top-line earnings growth toward return on capital employed (ROCE) when valuing electronics manufacturing services (EMS) businesses, according to a report by JPMorgan cited by news agency ANI. While strong revenue expansion has triggered a broad re-rating in price-to-earnings (P/E) multiples across the sector, the brokerage emphasized that return metrics must be factored into future valuations given the industry’s capital-intensive nature.
JPMorgan noted that companies generating higher ROCE deliver superior returns on deployed capital, predicting that market participants will scrutinise balance sheets more closely if earnings fall short of expectations or top-line growth moderates. Elevated net working capital requirements pose a particular risk to free cash flows, reflecting trends from late last year when revenue misses and extended working-capital cycles led to negative cash generation for selected market participants.
Although recent share price gains across parts of the EMS sector have been fueled by new orders from US clients in semiconductor equipment manufacturing and wider interest in chip ecosystems, JPMorgan cautioned that revenues from these ventures will scale up gradually. Consequently, several EMS stocks trading at steep P/E premiums despite lower ROCE profiles face heightened valuation risk across the broader market.
JPMorgan analysts noted: “In our view, the market will start looking at ROCEs once (1) there is a miss on earnings, (2) growth slows down, and (3) NWC remains high, thereby negatively impacting FCF.”
