What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Jai (NSE:JAICORPLTD) and its ROCE trend, we weren't exactly thrilled.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)
0.036 = ₹565m ÷ (₹16b - ₹274m) (Based on the trailing twelve months to June 2020).
Thus, Jai has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Packaging industry average of 11%.
Check out 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.
So How Is Jai's ROCE Trending?
Over the past five years, Jai's ROCE has remained relatively flat while the business is using 31% less capital than before. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. In addition to that, since the ROCE doesn't scream "quality" at 3.6%, it's hard to get excited about these developments.
The Bottom Line On Jai's ROCE
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 66% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
While Jai doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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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About NSEI:JAICORPLTD
Jai
Primarily engages in the plastic processing business in India and internationally.
Flawless balance sheet with acceptable track record.
