Jubilant FoodWorks (NSE:JUBLFOOD) Could Be Struggling To Allocate Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Jubilant FoodWorks (NSE:JUBLFOOD) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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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 Jubilant FoodWorks, this is the formula:

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

0.12 = ₹7.5b ÷ (₹83b - ₹19b) (Based on the trailing twelve months to December 2024).

Thus, Jubilant FoodWorks has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 8.5% it's much better.

See our latest analysis for Jubilant FoodWorks

In the above chart we have measured Jubilant FoodWorks' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Jubilant FoodWorks for free.

What Does the ROCE Trend For Jubilant FoodWorks Tell Us?

When we looked at the ROCE trend at Jubilant FoodWorks, we didn't gain much confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 12%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

While returns have fallen for Jubilant FoodWorks in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 103% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing: We've identified 2 warning signs with Jubilant FoodWorks (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.