Jindal Poly Films (NSE:JINDALPOLY) Knows How To Allocate Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. And in light of that, the trends we're seeing at Jindal Poly Films' (NSE:JINDALPOLY) look very promising so lets take a look.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Jindal Poly Films is:

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

0.27 = ₹9.6b ÷ (₹43b - ₹7.2b) (Based on the trailing twelve months to December 2020).

Thus, Jindal Poly Films has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 15%.

Check out our latest analysis for Jindal Poly Films

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

What Does the ROCE Trend For Jindal Poly Films Tell Us?

You'd find it hard not to be impressed with the ROCE trend at Jindal Poly Films. The figures show that over the last five years, returns on capital have grown by 72%. The company is now earning ₹0.3 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 24% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

What We Can Learn From Jindal Poly Films' ROCE

In a nutshell, we're pleased to see that Jindal Poly Films has been able to generate higher returns from less capital. And with a respectable 67% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

Jindal Poly Films does have some risks though, and we've spotted 1 warning sign for Jindal Poly Films that you might be interested in.

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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