PC Jeweller (NSE:PCJEWELLER) Might Be Having Difficulty Using Its Capital Effectively

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. 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?

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 PC Jeweller is:

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

0.053 = ₹2.2b ÷ (₹78b - ₹36b) (Based on the trailing twelve months to December 2021).

Therefore, PC Jeweller has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 11%.

See our latest analysis for PC Jeweller

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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.

What Can We Tell From PC Jeweller's ROCE Trend?

On the surface, the trend of ROCE at PC Jeweller doesn't inspire confidence. Around five years ago the returns on capital were 25%, but since then they've fallen to 5.3%. 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.

Another thing to note, PC Jeweller has a high ratio of current liabilities to total assets of 46%. 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

In summary, we're somewhat concerned by PC Jeweller's diminishing returns on increasing amounts of capital. This could explain why the stock has sunk a total of 92% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we've found 2 warning signs for PC Jeweller that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.