Jayant Agro-Organics (NSE:JAYAGROGN) Will Be Hoping To Turn Its Returns On Capital Around

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. So while Jayant Agro-Organics (NSE:JAYAGROGN) has a high ROCE right now, lets see what we can decipher from how returns are changing.

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 Jayant Agro-Organics, this is the formula:

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

0.23 = ₹1.3b ÷ (₹7.4b - ₹1.7b) (Based on the trailing twelve months to September 2022).

Therefore, Jayant Agro-Organics has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 17%.

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.

The Trend Of ROCE

On the surface, the trend of ROCE at Jayant Agro-Organics doesn't inspire confidence. Historically returns on capital were even higher at 34%, but they have dropped over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Jayant Agro-Organics 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.

Our Take On Jayant Agro-Organics' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Jayant Agro-Organics is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 53% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Jayant Agro-Organics does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.