Returns On Capital At Jainam Ferro Alloys (I) (NSE:JAINAM) Paint A Concerning Picture

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Jainam Ferro Alloys (I) (NSE:JAINAM), we don't think it's current trends fit the mold of a multi-bagger.

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 Jainam Ferro Alloys (I), this is the formula:

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

0.081 = ₹84m ÷ (₹1.3b - ₹243m) (Based on the trailing twelve months to September 2023).

So, Jainam Ferro Alloys (I) has an ROCE of 8.1%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 15%.

See our latest analysis for Jainam Ferro Alloys (I)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jainam Ferro Alloys (I)'s ROCE against it's prior returns. If you'd like to look at how Jainam Ferro Alloys (I) has performed in the past in other metrics, you can view this free graph of Jainam Ferro Alloys (I)'s past earnings, revenue and cash flow.

So How Is Jainam Ferro Alloys (I)'s ROCE Trending?

On the surface, the trend of ROCE at Jainam Ferro Alloys (I) doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last four years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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, Jainam Ferro Alloys (I) has done well to pay down its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Jainam Ferro Alloys (I)'s ROCE

In summary, we're somewhat concerned by Jainam Ferro Alloys (I)'s diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 1.8% in the last year. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Jainam Ferro Alloys (I) does have some risks though, and we've spotted 2 warning signs for Jainam Ferro Alloys (I) that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.