Should We Be Excited About The Trends Of Returns At Lypsa Gems & Jewellery (NSE:LYPSAGEMS)?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Lypsa Gems & Jewellery (NSE:LYPSAGEMS), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Lypsa Gems & Jewellery:

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

0.016 = ₹23m ÷ (₹4.0b - ₹2.5b) (Based on the trailing twelve months to September 2020).

Thus, Lypsa Gems & Jewellery has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 8.1%.

Check out our latest analysis for Lypsa Gems & Jewellery

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 Lypsa Gems & Jewellery's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Lypsa Gems & Jewellery's ROCE Trending?

When we looked at the ROCE trend at Lypsa Gems & Jewellery, we didn't gain much confidence. To be more specific, ROCE has fallen from 51% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Lypsa Gems & Jewellery has done well to pay down its current liabilities to 64% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 64% is still pretty high, so those risks are still somewhat prevalent.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Lypsa Gems & Jewellery have fallen, meanwhile the business is employing more capital than it was five years ago. Unsurprisingly then, the stock has dived 97% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing to note, we've identified 2 warning signs with Lypsa Gems & Jewellery and understanding them 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.

If you’re looking to trade Lypsa Gems & Jewellery, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.