Returns On Capital Signal Tricky Times Ahead For SJVN (NSE:SJVN)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think SJVN (NSE:SJVN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. Analysts use this formula to calculate it for SJVN:

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

0.079 = ₹15b ÷ (₹213b - ₹23b) (Based on the trailing twelve months to December 2021).

Therefore, SJVN has an ROCE of 7.9%. Even though it's in line with the industry average of 7.9%, it's still a low return by itself.

Check out our latest analysis for SJVN

Historical performance is a great place to start when researching a stock so above you can see the gauge for SJVN's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of SJVN, check out these free graphs here.

What Does the ROCE Trend For SJVN Tell Us?

When we looked at the ROCE trend at SJVN, we didn't gain much confidence. To be more specific, ROCE has fallen from 10% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On SJVN's ROCE

In summary, SJVN is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 18% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

SJVN does have some risks though, and we've spotted 1 warning sign for SJVN that you might be interested in.

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.