Jaiprakash Associates (NSE:JPASSOCIAT) Is Experiencing Growth In Returns On Capital

Simply Wall St
April 12, 2022
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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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at Jaiprakash Associates (NSE:JPASSOCIAT) so let's look a bit deeper.

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. To calculate this metric for Jaiprakash Associates, this is the formula:

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

0.026 = ₹6.0b ÷ (₹372b - ₹144b) (Based on the trailing twelve months to December 2021).

So, Jaiprakash Associates has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Industrials industry average of 9.7%.

View our latest analysis for Jaiprakash Associates

NSEI:JPASSOCIAT Return on Capital Employed April 12th 2022

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

So How Is Jaiprakash Associates' ROCE Trending?

While the ROCE is still rather low for Jaiprakash Associates, we're glad to see it heading in the right direction. We found that the returns on capital employed over the last five years have risen by 20%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 57% less capital than it was five years ago. Jaiprakash Associates may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Bottom Line On Jaiprakash Associates' ROCE

From what we've seen above, Jaiprakash Associates has managed to increase it's returns on capital all the while reducing it's capital base. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing to note, we've identified 1 warning sign with Jaiprakash Associates and understanding it should be part of your investment process.

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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