Will Jindal Stainless (Hisar) (NSE:JSLHISAR) Multiply In Value Going Forward?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at Jindal Stainless (Hisar) (NSE:JSLHISAR), it didn't seem to tick all of these boxes.

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. To calculate this metric for Jindal Stainless (Hisar), this is the formula:

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

0.14 = ₹6.1b ÷ (₹67b - ₹25b) (Based on the trailing twelve months to December 2020).

Thus, Jindal Stainless (Hisar) has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 9.6% it's much better.

View 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.

The Trend Of ROCE

In terms of Jindal Stainless (Hisar)'s historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 14% from 42% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Jindal Stainless (Hisar) has decreased its current liabilities to 37% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

In summary, we're somewhat concerned by Jindal Stainless (Hisar)'s diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 325% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing, we've spotted 2 warning signs facing Jindal Stainless (Hisar) that you might find interesting.

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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