If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Jain Irrigation Systems (NSE: JISLJALEQS), it didn’t seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
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 Jain Irrigation Systems is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.061 = ₹3.8b ÷ (₹130b – ₹69b) (Based on the trailing twelve months to September 2021).
Therefore, Jain Irrigation Systems has an ROCE of 6.1%. In absolute terms, that’s a low return and it also under-performs the Machinery industry average of 14%.
See our latest analysis for Jain Irrigation Systems
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 want to delve into the historical earnings, revenue and cash flow of Jain Irrigation Systems, check out these free graphs here.
What Does the ROCE Trend For Jain Irrigation Systems Tell Us?
Unfortunately, the trend isn’t great with ROCE falling from 13% five years ago, while capital employed has grown 37%. Usually this isn’t ideal, but given Jain Irrigation Systems conducted a capital raising before their most recent earnings announcement, that would’ve likely contributed, increased at least partially, to the capital employed figure. It’s unlikely that all of the raised funds have been put to work yet, so as a consequence Jain Irrigation Systems might not have received a full period of earnings contribution from it.
On a side note, Jain Irrigation Systems’ current liabilities are still rather high at 53% 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. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.
Our Take On Jain Irrigation Systems’ 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 Jain Irrigation Systems. And there could be an opportunity here if other metrics look good too, because the stock has declined 58% in the last five years. So we think it’d be worthwhile to look further into this stock given the trends look encouragement.
Jain Irrigation Systems does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is significant…
While Jain Irrigation Systems 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.
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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.