Jindal Stainless (Hisar) (NSE:JSLHISAR) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after investigating Jindal Stainless (Hisar) (NSE:JSLHISAR), we don't think it's current trends fit the mold of a multi-bagger.

What is 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. The formula for this calculation on Jindal Stainless (Hisar) is:

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

0.19 = ₹8.4b ÷ (₹70b - ₹27b) (Based on the trailing twelve months to March 2021).

Thus, Jindal Stainless (Hisar) has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 12% it's much better.

Check out our latest analysis for Jindal Stainless (Hisar)

Above you can see how the current ROCE for Jindal Stainless (Hisar) 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 Jindal Stainless (Hisar) here for free.

What Does the ROCE Trend For Jindal Stainless (Hisar) Tell Us?

When we looked at the ROCE trend at Jindal Stainless (Hisar), we didn't gain much confidence. Over the last five years, returns on capital have decreased to 19% from 30% five years ago. However it looks like Jindal Stainless (Hisar) might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Jindal Stainless (Hisar) has done well to pay down its current liabilities to 39% 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.

The Bottom Line On Jindal Stainless (Hisar)'s ROCE

Bringing it all together, while we're somewhat encouraged by Jindal Stainless (Hisar)'s reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 415% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing: We've identified 3 warning signs with Jindal Stainless (Hisar) (at least 1 which is significant) , and understanding these would certainly be useful.

While Jindal Stainless (Hisar) 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. 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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