Jay Bharat Maruti (NSE:JAYBARMARU) Will Will Want To Turn Around Its Return Trends

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Jay Bharat Maruti (NSE:JAYBARMARU) and its ROCE trend, we weren't exactly thrilled.

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

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. Analysts use this formula to calculate it for Jay Bharat Maruti:

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

0.073 = ₹566m ÷ (₹12b - ₹4.4b) (Based on the trailing twelve months to December 2020).

So, Jay Bharat Maruti has an ROCE of 7.3%. In absolute terms, that's a low return but it's around the Auto Components industry average of 8.6%.

View our latest analysis for Jay Bharat Maruti

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're interested in investigating Jay Bharat Maruti's past further, check out this free graph of past earnings, revenue and cash flow.

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

On the surface, the trend of ROCE at Jay Bharat Maruti doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.3% from 21% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

Our Take On Jay Bharat Maruti's ROCE

We're a bit apprehensive about Jay Bharat Maruti because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Despite the concerning underlying trends, the stock has actually gained 39% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we found 6 warning signs for Jay Bharat Maruti (2 don't sit too well with us) you should be aware of.

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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