Jayant Agro-Organics' (NSE:JAYAGROGN) Returns Have Hit A Wall

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Jayant Agro-Organics' (NSE:JAYAGROGN) ROCE trend, we were pretty happy with what we saw.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Jayant Agro-Organics, this is the formula:

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

0.16 = ₹643m ÷ (₹6.4b - ₹2.3b) (Based on the trailing twelve months to December 2020).

So, Jayant Agro-Organics has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 15% generated by the Chemicals industry.

View our latest analysis for Jayant Agro-Organics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jayant Agro-Organics' ROCE against it's prior returns. If you're interested in investigating Jayant Agro-Organics' past further, check out this free graph of past earnings, revenue and cash flow.

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

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 16% and the business has deployed 43% more capital into its operations. Since 16% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 36% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Key Takeaway

The main thing to remember is that Jayant Agro-Organics has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 172% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

One more thing: We've identified 3 warning signs with Jayant Agro-Organics (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

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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