Here's What's Concerning About Jay Bharat Maruti's (NSE:JAYBARMARU) Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Jay Bharat Maruti (NSE:JAYBARMARU) we aren't filled with optimism, but let's investigate further.

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. To calculate this metric for Jay Bharat Maruti, this is the formula:

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

0.12 = ₹932m ÷ (₹13b - ₹5.4b) (Based on the trailing twelve months to March 2023).

Thus, Jay Bharat Maruti has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 14% generated by the Auto Components industry.

See our latest analysis for Jay Bharat Maruti

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

What Can We Tell From Jay Bharat Maruti's ROCE Trend?

We are a bit worried about the trend of returns on capital at Jay Bharat Maruti. Unfortunately the returns on capital have diminished from the 17% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Jay Bharat Maruti becoming one if things continue as they have.

On a side note, Jay Bharat Maruti's current liabilities are still rather high at 41% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Jay Bharat Maruti's ROCE

In summary, it's unfortunate that Jay Bharat Maruti is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 14% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 4 warning signs for Jay Bharat Maruti (2 make us uncomfortable) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.