Should We Be Excited About The Trends Of Returns At Jindal Stainless (Hisar) (NSE:JSLHISAR)?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Jindal Stainless (Hisar) (NSE:JSLHISAR) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Jindal Stainless (Hisar), this is the formula:

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

0.11 = ₹4.5b ÷ (₹67b - ₹25b) (Based on the trailing twelve months to September 2020).

Thus, Jindal Stainless (Hisar) has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.8% generated by the Metals and Mining industry.

View our latest analysis for Jindal Stainless (Hisar)

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Jindal Stainless (Hisar) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Jindal Stainless (Hisar) doesn't inspire confidence. To be more specific, ROCE has fallen from 40% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Jindal Stainless (Hisar) has done well to pay down its current liabilities to 37% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Jindal Stainless (Hisar) have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 49% over the last three years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Jindal Stainless (Hisar) does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

While Jindal Stainless (Hisar) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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