There Are Reasons To Feel Uneasy About JK Tyre & Industries' (NSE:JKTYRE) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Although, when we looked at JK Tyre & Industries (NSE:JKTYRE), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for JK Tyre & Industries:

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

0.10 = ₹6.7b ÷ (₹104b - ₹40b) (Based on the trailing twelve months to December 2020).

Therefore, JK Tyre & Industries has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 8.8% generated by the Auto Components industry.

See our latest analysis for JK Tyre & Industries

Above you can see how the current ROCE for JK Tyre & Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is JK Tyre & Industries' ROCE Trending?

When we looked at the ROCE trend at JK Tyre & Industries, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 10% from 24% 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.

The Bottom Line

In summary, we're somewhat concerned by JK Tyre & Industries' diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 55% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

JK Tyre & Industries does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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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