Has TCPL Packaging (NSE:TCPLPACK) Got What It Takes To Become A Multi-Bagger?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at TCPL Packaging (NSE:TCPLPACK) and its ROCE trend, we weren't exactly thrilled.

What is 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 TCPL Packaging:

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

0.15 = ₹731m ÷ (₹8.0b - ₹3.2b) (Based on the trailing twelve months to June 2020).

So, TCPL Packaging has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Packaging industry average of 12% it's much better.

View our latest analysis for TCPL Packaging

Historical performance is a great place to start when researching a stock so above you can see the gauge for TCPL Packaging's ROCE against it's prior returns. If you'd like to look at how TCPL Packaging has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at TCPL Packaging doesn't inspire confidence. Around five years ago the returns on capital were 28%, but since then they've fallen to 15%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, TCPL Packaging has a high ratio of current liabilities to total assets of 40%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

To conclude, we've found that TCPL Packaging is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 40% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing: We've identified 4 warning signs with TCPL Packaging (at least 2 which are potentially serious) , and understanding them would certainly be useful.

While TCPL Packaging 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. 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.
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