If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Jubilant FoodWorks (NSE:JUBLFOOD), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Jubilant FoodWorks is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = ₹3.3b ÷ (₹34b - ₹7.1b) (Based on the trailing twelve months to June 2020).
So, Jubilant FoodWorks has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 4.8% generated by the Hospitality industry.
Above you can see how the current ROCE for Jubilant FoodWorks compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Jubilant FoodWorks.
What Does the ROCE Trend For Jubilant FoodWorks Tell Us?
On the surface, the trend of ROCE at Jubilant FoodWorks doesn't inspire confidence. To be more specific, ROCE has fallen from 21% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.On a side note, Jubilant FoodWorks has done well to pay down its current liabilities to 21% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line
To conclude, we've found that Jubilant FoodWorks is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 238% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
Jubilant FoodWorks does have some risks though, and we've spotted 2 warning signs for Jubilant FoodWorks that you might be interested in.
While Jubilant FoodWorks isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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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