The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want a simplistic look at the return on Lypsa Gems & Jewellery Limited (NSE:LYPSAGEMS) stock.
If you purchase a LYPSAGEMS share you are effectively becoming a partner with many other shareholders. 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 Lypsa Gems & Jewellery, 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).
Lypsa Gems & Jewellery’s Return On Capital Employed
As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. To determine Lypsa Gems & Jewellery’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). I have calculated Lypsa Gems & Jewellery’s ROCE for you below:
ROCE Calculation for LYPSAGEMS
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = ₹280.64m ÷ (₹2.73b – ₹1.53b) = 23.33%
The calculation above shows that LYPSAGEMS’s earnings were 23.33% of capital employed. Comparing this to a healthy 15% benchmark shows Lypsa Gems & Jewellery is currently able to return a strong amount to owners for the use of their capital, which is a good sign for those who believe this will continue and the company’s management will find good uses for the earnings they create.
Can any of this change?
Although Lypsa Gems & Jewellery is in a favourable position, you should know that this could change if the company is unable to maintain a strong ROCE above the benchmark, which will depend on the behaviour of the underlying variables (EBT and capital employed). Therefore, investors need to be confident in the trend of the inputs in the formula above, so that Lypsa Gems & Jewellery will continue the solid returns. Looking three years in the past, it is evident that LYPSAGEMS’s ROCE has deteriorated from 37.33%, indicating the company’s capital returns have declined. Over the same period, EBT went from ₹196.83m to ₹280.64m but capital employed has grown by a proportionally greater amount as a result of a smaller amount of current liabilities used (meaning the company has used less borrowed money than shareholder capital to produce earnings) , indicating that the previous growth in earnings has not been able to improve ROCE because the company now needs to employ more capital to operate the business.
Despite LYPSAGEMS’s downward trend in ROCE in the recent past, the company still remains an attractive candidate that is capable of producing solid capital returns and a potentially strong return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and management ability. Without considering these fundamentals, you cannot be sure if the downward path is a signal to run, or just a blip in an otherwise solid return profile. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for LYPSAGEMS’s future growth? Take a look at our free research report of analyst consensus for LYPSAGEMS’s outlook.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Lypsa Gems & Jewellery’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.