Here's What's Concerning About PC Jeweller's (NSE:PCJEWELLER) Returns On Capital

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. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at PC Jeweller (NSE:PCJEWELLER) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on PC Jeweller is:

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

0.098 = ₹4.1b ÷ (₹78b - ₹36b) (Based on the trailing twelve months to September 2021).

Therefore, PC Jeweller has an ROCE of 9.8%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 15%.

See our latest analysis for PC Jeweller

Historical performance is a great place to start when researching a stock so above you can see the gauge for PC Jeweller's ROCE against it's prior returns. If you'd like to look at how PC Jeweller has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at PC Jeweller, we didn't gain much confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 9.8%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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 separate but related note, it's important to know that PC Jeweller has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From PC Jeweller's ROCE

To conclude, we've found that PC Jeweller is reinvesting in the business, but returns have been falling. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 86% in the last five years. Therefore based on the analysis done in this article, we don't think PC Jeweller has the makings of a multi-bagger.

If you'd like to know more about PC Jeweller, we've spotted 4 warning signs, and 2 of them are a bit concerning.

While PC Jeweller 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.