I am writing today to help inform people who are new to the stock market and looking to gauge the potential return on investment in Jet Knitwears Limited (NSE:JETKNIT).
Jet Knitwears stock represents an ownership share in the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Thus, to understand how your money can grow by investing in Jet Knitwears, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).
What is Return on Capital Employed (ROCE)?
You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. To determine Jet Knitwears’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). JETKNIT’s ROCE is calculated below:
ROCE Calculation for JETKNIT
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = ₹16.2m ÷ (₹303.5m – ₹141.9m) = 10.0%
JETKNIT’s 10.0% ROCE means that for every ₹100 you invest, the company creates ₹10. A good ROCE hurdle you should aim for in your investments is 15%, which JETKNIT has just fallen short of, meaning the company creates an unideal amount of earnings from capital employed.
What is causing this?
Although Jet Knitwears is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. Because of this, it is important to look beyond the final value of JETKNIT’s ROCE and understand what is happening to the individual components. Three years ago, JETKNIT’s ROCE was 5.8%, which means the company’s capital returns have improved. We can see that earnings have increased from ₹4.9m to ₹16.2m whilst capital employed also increased but to a smaller extent, which means the company has been able to improve ROCE by driving up earnings relative to the capital invested in the business.
ROCE for JETKNIT investors is below the desired level at the moment, however, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and management ability to determine if an opportunity exists that isn’t made apparent by looking at past data. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate JETKNIT or move on to other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for JETKNIT’s future growth? Take a look at our free research report of analyst consensus for JETKNIT’s outlook.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Jet Knitwears’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.