PC Jeweller (NSE:PCJEWELLER) Could Be Struggling To Allocate Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at PC Jeweller (NSE:PCJEWELLER), we've spotted some signs that it could be struggling, so let's investigate.

What Is 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 PC Jeweller is:

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

0.059 = ₹2.2b ÷ (₹76b - ₹39b) (Based on the trailing twelve months to March 2023).

Thus, PC Jeweller has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 12%.

Check out 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're interested in investigating PC Jeweller's past further, check out this free graph of past earnings, revenue and cash flow.

SWOT Analysis for PC Jeweller

How Are Returns Trending?

There is reason to be cautious about PC Jeweller, given the returns are trending downwards. About five years ago, returns on capital were 24%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on PC Jeweller becoming one if things continue as they have.

On a side note, PC Jeweller's current liabilities are still rather high at 51% of total assets. 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.

The Bottom Line On PC Jeweller's ROCE

In summary, it's unfortunate that PC Jeweller is generating lower returns from the same amount of capital. Unsurprisingly then, the stock has dived 82% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

PC Jeweller does have some risks though, and we've spotted 2 warning signs for PC Jeweller that you might be interested in.

While PC Jeweller 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.