Technology · Technology Hardware
EMS Economics: Thin Margins and ROIC
Contract manufacturers can earn a return on capital with single-digit gross margins when capital turns fast. Jabil FY2025 as the worked case.
Selborne Research · Technology Hardware coverage: 8 guides, 7 company profiles, a primer and Excel model
Educational analysis. This guide is not investment advice or a recommendation to buy or sell any security, and it is not personalised.
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Thin Gross Margin Can Still Earn a Return If Capital Turns
An electronics manufacturing services (EMS) company invoices the full cost of building a customer’s product and keeps a thin manufacturing spread. Gross margin on that pass-through revenue often sits in the single digits. Setting 8% gross margin beside a brand’s 35% says little. The test is whether the after-tax operating profit earned on the capital actually funded (net working capital plus net PP&E) is adequate.
Return on invested capital, for that screen, is NOPAT / (net working capital + net PP&E). That definition puts a 4% operating margin on fast-turning capital on the same scale as a 30% margin earned on little capital.
Jabil FY2025: The Worked Case
| Metric | FY2025 |
|---|---|
| Revenue | $29.8B |
| Gross margin | 8.9% |
| Operating margin | 4.0% |
| R&D % of revenue | 0.1% |
| Stock compensation % of revenue | 0.4% |
| Inventory | $4.7B |
| Five largest customers | ~36% of revenue |
| DIO / DSO / DPO / CCC (days) | 63 / 49 / 107 / 6 |
| Free cash flow (OCF - gross capex) | $1.2B |
| Company adjusted free cash flow (OCF - net capex) | $1,318M |
Gross margin of 8.9% and operating margin of 4.0% are the pass-through shape. R&D at 0.1% of revenue is not a product-roadmap business; the customer owns the design. Stock compensation at 0.4% of revenue is low beside many hardware brands.
Working Capital Is the Business
Jabil’s FY2025 cash conversion cycle was 6 days. That is 63 days of inventory, 49 days of sales and 107 days of payables. The short cycle is after selling about $1.3B of receivables ($927M + $372M). Without those sales the receivables balance, and therefore DSO, would be higher.
Inventory of $4.7B against $29.8B of revenue is still a large absolute stock. The EMS model lives on turning that stock and collecting (or selling) receivables faster than the thin margin would suggest. The peer ladder that places Jabil at 6 days beside Apple at -71 and Arista at 256 is in Cash Conversion Cycle by Hardware Company.
Customer concentration belongs in the same picture. About 36% of FY2025 revenue sat with the five largest customers. Programme wins and losses move volume in steps.
Two Free Cash Flow Figures, One Filing
Jabil’s FY2025 free cash flow as operating cash flow less gross capex was $1.2B. The company also presents adjusted free cash flow of $1,318M using net capex. Both are useful; they are not the same definition. A model should pick one treatment of capex and keep it when comparing years.
Neither figure is a substitute for ROIC. Free cash flow can look strong in a year when working capital releases, then reverse when programmes ramp and inventory rebuilds.
What the EMS Screen Is For
Use filed operating margin and the days counts to see whether the thin margin sits on a fast capital turn. Check the receivables-sold disclosure before trusting a short DSO, and size programme risk from customer concentration. The negative cash conversion cycle guide explains why a brand can run negative while an EMS stays near zero after financing choices.
The filing states no ROIC percentage, so none is given here. The identity NOPAT / (net working capital + net PP&E) is the screen; the inputs come from the income statement and balance sheet for the year under review.
Technology Hardware Sector Primer
The primer values an EMS on pass-through revenue and invested capital so thin margins are judged by return on capital, not by gross margin alone.
- 17 sections, from units, price and the product cycle to working capital in days, mid-cycle margins and a reverse DCF
- 43 pages
- a device brand, a networking maker, a contract manufacturer and a storage maker, all fictional
- 4 worked valuations
- listed hardware makers on filed margins, working-capital days and purchase commitments, each with its fiscal year
- 7-company screen
The Excel model is the primer's product-cycle DCF live across 13 sheets: a device brand, a networking maker, a contract manufacturer and a storage maker, all fictional, plus a column for a company of your own in any of five business-model modes. Revenue is built from trend units, a yearly cycle index and price, with a recurring line on the installed base and an order book for networking; gross margin carries a fixed share of cost of goods, so it rises and falls with the cycle; working capital runs in days; capex funds growth; and the terminal value is struck on mid-cycle cash flow. A reverse DCF reads the margin and the unit growth a price requires, and the sensitivity grids re-run the model in every cell. Change the cycle, the days or the margin and the value moves.
See what's in the Technology Hardware Sector Primer →£25 PDF · £59 with the Excel model · £159 for all three Technology industries
Frequently Asked Questions
- Why are EMS gross margins single digit?
- Electronics manufacturing services companies build products designed and owned by their customers. Much of the bill of materials passes through revenue and cost at little markup, so gross margin on the full invoice is thin even when the manufacturing fee earns a return on the capital tied up in the factory and working capital.
- How is ROIC defined for an EMS screen?
- Return on invested capital here is NOPAT divided by net working capital plus net property, plant and equipment. The definition puts the thin operating margin over the capital that actually has to be funded, so a fast inventory and receivables turn lets a thin margin earn a real return, measured on the same scale as a high-margin brand.
- What were Jabil margins and cash conversion in FY2025?
- Jabil filed revenue of $29.8B, gross margin of 8.9% and operating margin of 4.0% for FY2025. Cash conversion cycle was 6 days after selling about $1.3B of receivables. Free cash flow as operating cash flow less gross capex was $1.2B; the company also reports adjusted free cash flow of $1,318M using net capex.
- How concentrated are EMS customers?
- In Jabil FY2025 the five largest customers were about 36% of revenue.
Read next
Negative Cash Conversion Cycles in Hardware
How DIO, DSO and DPO combine into the cash conversion cycle, why some hardware brands run negative, and what one day of sales is worth on filed revenue.
Cash Conversion Cycle by Hardware Company
Seven hardware filers ranked by cash conversion cycle with DIO, DSO and DPO beside each figure, including why the short Jabil cycle follows receivables sold.
See it applied
These company profiles apply the concepts from this guide to real public companies.
Also in Technology Hardware
- Negative Cash Conversion Cycles in Hardware
- Cash Conversion Cycle by Hardware Company
- Purchase Commitments vs Inventory in Hardware
- EMS Economics: Thin Margins and ROIC
- Mid-Cycle Margins for Hardware Companies
- Gross Margin Ranges in Hardware Since FY2016
- Hardware Product vs Services Gross Margin
- PC and Smartphone Replacement Cycles