The Return Trends At JK Lakshmi Cement (NSE:JKLAKSHMI) Look Promising

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at JK Lakshmi Cement (NSE:JKLAKSHMI) and its trend of ROCE, we really liked what we saw.

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 JK Lakshmi Cement, this is the formula:

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

0.17 = ₹7.2b ÷ (₹59b - ₹17b) (Based on the trailing twelve months to June 2022).

So, JK Lakshmi Cement has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Basic Materials industry average of 10% it's much better.

Check out the opportunities and risks within the IN Basic Materials industry.

In the above chart we have measured JK Lakshmi Cement's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for JK Lakshmi Cement.

What Can We Tell From JK Lakshmi Cement's ROCE Trend?

JK Lakshmi Cement has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 223% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

What We Can Learn From JK Lakshmi Cement's ROCE

In summary, we're delighted to see that JK Lakshmi Cement has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 38% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing to note, we've identified 1 warning sign with JK Lakshmi Cement and understanding this should be part of your investment process.

While JK Lakshmi Cement 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.