Investors Could Be Concerned With Jain Irrigation Systems' (NSE:JISLJALEQS) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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. On that note, looking into Jain Irrigation Systems (NSE:JISLJALEQS), we weren't too upbeat about how things were going.

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 Jain Irrigation Systems:

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

0.056 = ₹4.3b ÷ (₹126b - ₹50b) (Based on the trailing twelve months to June 2022).

So, Jain Irrigation Systems has an ROCE of 5.6%. Ultimately, that's a low return and it under-performs the Machinery industry average of 14%.

View our latest analysis for Jain Irrigation Systems

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 Jain Irrigation Systems' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Jain Irrigation Systems' ROCE Trending?

There is reason to be cautious about Jain Irrigation Systems, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 8.7% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Jain Irrigation Systems becoming one if things continue as they have.

What We Can Learn From Jain Irrigation Systems' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 57% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Jain Irrigation Systems (including 1 which makes us a bit uncomfortable) .

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.