The Returns At Jyothy Labs (NSE:JYOTHYLAB) Aren't Growing

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Jyothy Labs (NSE:JYOTHYLAB) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding 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. The formula for this calculation on Jyothy Labs is:

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

0.19 = ₹2.8b ÷ (₹20b - ₹4.7b) (Based on the trailing twelve months to March 2021).

Thus, Jyothy Labs has an ROCE of 19%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Household Products industry average of 17%.

Check out our latest analysis for Jyothy Labs

Above you can see how the current ROCE for Jyothy Labs compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Jyothy Labs here for free.

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. The company has employed 54% more capital in the last five years, and the returns on that capital have remained stable at 19%. 19% is a pretty standard return, and it provides some comfort knowing that Jyothy Labs has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Jyothy Labs has done well to reduce current liabilities to 24% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

To sum it up, Jyothy Labs has simply been reinvesting capital steadily, at those decent rates of return. And given the stock has only risen 22% over the last five years, we'd suspect the market is beginning to recognize these trends. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

On a separate note, we've found 1 warning sign for Jyothy Labs you'll probably want to know about.

While Jyothy Labs may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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