Here's What To Make Of Jai's (NSE:JAICORPLTD) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Jai (NSE:JAICORPLTD) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Jai is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.045 = ₹707m ÷ (₹16b - ₹274m) (Based on the trailing twelve months to March 2020).

Thus, Jai has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 13%.

View our latest analysis for Jai

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jai's ROCE against it's prior returns. If you'd like to look at how Jai has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Jai Tell Us?

Over the past five years, Jai's ROCE has remained relatively flat while the business is using 31% less capital than before. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

In Conclusion...

Overall, we're not ecstatic to see Jai reducing the amount of capital it employs in the business. Although the market must be expecting these trends to improve because the stock has gained 54% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing to note, we've identified 1 warning sign with Jai and understanding it should be part of your investment process.

While Jai isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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