SJVN (NSE:SJVN) reinvests at lower rates of return
What trends should we look for if we want to identify stocks that can multiply in value over the long term? First, we’ll want to see proof to return to on capital employed (ROCE) which is increasing, and on the other hand, a based capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. That said, at a first glance at SJVN (NSE:SJVN) we’re not jumping off our chairs on the yield trend, but taking a closer look.
What is return on capital employed (ROCE)?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for SJVN:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.076 = ₹14b ÷ (₹213b – ₹23b) (Based on the last twelve months to September 2021).
Therefore, SJVN has a ROCE of 7.6%. In absolute terms, that’s a low return, but it’s around the electric utility industry average of 7.3%.
Check out our latest analysis for SJVN
Historical performance is a great starting point when researching a stock. So you can see above the gauge of SJVN’s ROCE compared to its past returns. If you want to see how SJVN has performed in the past in other metrics, you can see this free chart of past profits, revenue and cash flow.
So, what is the ROCE trend of SJVN?
In terms of historical SJVN ROCE movements, the trend is not fantastic. To be more specific, ROCE has fallen by 9.9% over the past five years. On the other hand, the company has employed more capital without a corresponding improvement in sales over the past year, which might suggest that these investments are longer-term investments. It’s worth keeping an eye on the company’s earnings going forward to see if those investments end up contributing to the bottom line.
The Key Takeaway
In summary, SJVN is reinvesting funds into the business for growth, but unfortunately, it seems sales haven’t grown much yet. Considering the stock has gained an impressive 51% over the past five years, investors must be thinking there are better things to come. But if the trajectory of these underlying trends continues, we think the likelihood of it being a multi-bagger from here is not high.
One more thing to note, we have identified 1 warning sign with SJVN and understanding this should be part of your investment process.
Although SJVN does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. look at this free list here.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.