There Are Reasons To Feel Uneasy About Jainam Ferro Alloys (I)'s (NSE:JAINAM) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Jainam Ferro Alloys (I) (NSE:JAINAM), we don't think it's current trends fit the mold of a multi-bagger.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

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. 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)

0.079 = ₹108m ÷ (₹1.8b - ₹430m) (Based on the trailing twelve months to March 2025).

Thus, Jainam Ferro Alloys (I) has an ROCE of 7.9%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 13%.

View 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.

How Are Returns Trending?

We weren't thrilled with the trend because Jainam Ferro Alloys (I)'s ROCE has reduced by 26% over the last five years, while the business employed 478% more capital. Usually this isn't ideal, but given Jainam Ferro Alloys (I) conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Jainam Ferro Alloys (I) probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Jainam Ferro Alloys (I) has done well to pay down its current liabilities to 24% 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

In summary, despite lower returns in the short term, we're encouraged to see that Jainam Ferro Alloys (I) is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 121% return over the last three years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Jainam Ferro Alloys (I) does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.