Returns On Capital Are Showing Encouraging Signs At Jindal Stainless (NSE:JSL)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Jindal Stainless (NSE:JSL) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Jindal Stainless is:

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

0.15 = ₹10b ÷ (₹107b - ₹41b) (Based on the trailing twelve months to March 2021).

Therefore, Jindal Stainless has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 12% generated by the Metals and Mining industry.

Check out our latest analysis for Jindal Stainless

In the above chart we have measured Jindal Stainless' 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 Jindal Stainless.

The Trend Of ROCE

Jindal Stainless has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 440% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 27% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Jindal Stainless may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

Our Take On Jindal Stainless' ROCE

In summary, it's great to see that Jindal Stainless has been able to turn things around and earn higher returns on lower amounts of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Jindal Stainless does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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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This article by Simply Wall St is general in nature. 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.
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