Returns On Capital At Century Plyboards (India) (NSE:CENTURYPLY) Paint An Interesting Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Century Plyboards (India) (NSE:CENTURYPLY), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Century Plyboards (India):

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

0.15 = ₹1.7b ÷ (₹17b - ₹4.9b) (Based on the trailing twelve months to June 2020).

So, Century Plyboards (India) has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Forestry industry.

View our latest analysis for Century Plyboards (India)

Above you can see how the current ROCE for Century Plyboards (India) compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Century Plyboards (India)'s ROCE Trending?

When we looked at the ROCE trend at Century Plyboards (India), we didn't gain much confidence. To be more specific, ROCE has fallen from 45% over the last five years. 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.

On a side note, Century Plyboards (India) has done well to pay down its current liabilities to 29% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Century Plyboards (India)'s ROCE

In summary, we're somewhat concerned by Century Plyboards (India)'s diminishing returns on increasing amounts of capital. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to continue researching Century Plyboards (India), you might be interested to know about the 3 warning signs that our analysis has discovered.

While Century Plyboards (India) 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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