Here's What's Concerning About JTL Industries' (NSE:JTLIND) Returns On Capital

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at JTL Industries (NSE:JTLIND) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for JTL Industries:

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

0.12 = ₹1.4b ÷ (₹13b - ₹1.4b) (Based on the trailing twelve months to September 2024).

So, JTL Industries has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 14% generated by the Metals and Mining industry.

See our latest analysis for JTL Industries

Above you can see how the current ROCE for JTL Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for JTL Industries .

So How Is JTL Industries' ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 36% five years ago, while capital employed has grown 2,222%. Usually this isn't ideal, but given JTL Industries conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with JTL Industries' earnings and if they change as a result from the capital raise. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

On a related note, JTL Industries has decreased its current liabilities to 10% 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. 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.

What We Can Learn From JTL Industries' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for JTL Industries. And the stock has followed suit returning a meaningful 60% to shareholders over the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to know some of the risks facing JTL Industries we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While JTL Industries 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.