Here's What's Concerning About Jayant Agro-Organics' (NSE:JAYAGROGN) Returns On Capital

If you're looking for a multi-bagger, there's a few things to 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 briefly looking over the numbers, we don't think Jayant Agro-Organics (NSE:JAYAGROGN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Jayant Agro-Organics:

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

0.18 = ₹1.0b ÷ (₹7.4b - ₹1.7b) (Based on the trailing twelve months to December 2022).

Therefore, Jayant Agro-Organics has an ROCE of 18%. That's a relatively normal return on capital, and it's around the 17% generated by the Chemicals industry.

See our latest analysis for Jayant Agro-Organics

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Jayant Agro-Organics, check out these free graphs here.

What Does the ROCE Trend For Jayant Agro-Organics Tell Us?

When we looked at the ROCE trend at Jayant Agro-Organics, we didn't gain much confidence. To be more specific, ROCE has fallen from 36% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Jayant Agro-Organics has decreased its current liabilities to 24% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Jayant Agro-Organics' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Jayant Agro-Organics. These growth trends haven't led to growth returns though, since the stock has fallen 47% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to continue researching Jayant Agro-Organics, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Jayant Agro-Organics 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. 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.