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

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Lypsa Gems & Jewellery (NSE:LYPSAGEMS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Lypsa Gems & Jewellery is:

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 December 2019).

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 9.4%.

See 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 want to delve into the historical earnings, revenue and cash flow of Lypsa Gems & Jewellery, check out these free graphs here.

What Can We Tell From Lypsa Gems & Jewellery's ROCE Trend?

On the surface, the trend of ROCE at Lypsa Gems & Jewellery doesn't inspire confidence. To be more specific, ROCE has fallen from 51% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Lypsa Gems & Jewellery has done well to pay down its current liabilities to 64% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Key Takeaway

In summary, we're somewhat concerned by Lypsa Gems & Jewellery's diminishing returns on increasing amounts of capital. This could explain why the stock has sunk a total of 92% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Lypsa Gems & Jewellery (including 3 which shouldn't be ignored) .

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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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.
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