Returns On Capital At Jain Irrigation Systems (NSE:JISLDVREQS) Paint A Concerning Picture

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. However, after investigating Jain Irrigation Systems (NSE:JISLDVREQS), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on Jain Irrigation Systems is:

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

0.07 = ₹4.3b ÷ (₹130b - ₹69b) (Based on the trailing twelve months to December 2021).

So, Jain Irrigation Systems has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 15%.

View our latest analysis for Jain Irrigation Systems

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jain Irrigation Systems' ROCE against it's prior returns. If you're interested in investigating Jain Irrigation Systems' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 14% five years ago, while capital employed has grown 37%. Usually this isn't ideal, but given Jain Irrigation Systems conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Jain Irrigation Systems' earnings and if they change as a result from the capital raise.

Another thing to note, Jain Irrigation Systems has a high ratio of current liabilities to total assets of 53%. 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.

What We Can Learn From Jain Irrigation Systems' ROCE

While returns have fallen for Jain Irrigation Systems in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 69% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to know some of the risks facing Jain Irrigation Systems we've found 4 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Jain Irrigation Systems isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.