We Like These Underlying Return On Capital Trends At JK Lakshmi Cement (NSE:JKLAKSHMI)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at JK Lakshmi Cement (NSE:JKLAKSHMI) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.19 = ₹7.7b ÷ (₹56b - ₹15b) (Based on the trailing twelve months to September 2021).

Thus, JK Lakshmi Cement has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Basic Materials industry average of 13% it's much better.

View our latest analysis for JK Lakshmi Cement

Above you can see how the current ROCE for JK Lakshmi Cement compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering JK Lakshmi Cement here for free.

How Are Returns Trending?

JK Lakshmi Cement's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 344% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In Conclusion...

To sum it up, JK Lakshmi Cement is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a solid 56% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 2 warning signs facing JK Lakshmi Cement that you might find interesting.

While JK Lakshmi Cement may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.