Will Jyothy Labs' (NSE:JYOTHYLAB) Growth In ROCE Persist?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Jyothy Labs (NSE:JYOTHYLAB) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Jyothy Labs, this is the formula:

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

0.17 = ₹2.4b ÷ (₹19b - ₹5.1b) (Based on the trailing twelve months to December 2020).

Thus, Jyothy Labs has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Household Products industry average of 16%.

See 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

Jyothy Labs has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 57% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 27% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

In summary, we're delighted to see that Jyothy Labs has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Considering the stock has delivered 10% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

Jyothy Labs does have some risks though, and we've spotted 1 warning sign for Jyothy Labs that you might be interested in.

While Jyothy Labs 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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