Should You Be Impressed By Archidply Industries' (NSE:ARCHIDPLY) Returns on Capital?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Archidply Industries (NSE:ARCHIDPLY) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Archidply Industries, this is the formula:

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

0.12 = ₹120m ÷ (₹1.9b - ₹927m) (Based on the trailing twelve months to March 2020).

Therefore, Archidply Industries has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Forestry industry average of 11%.

View our latest analysis for Archidply Industries

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

What Does the ROCE Trend For Archidply Industries Tell Us?

Things have been pretty stable at Archidply Industries, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Archidply Industries doesn't end up being a multi-bagger in a few years time.

Another thing to note, Archidply Industries has a high ratio of current liabilities to total assets of 48%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Archidply Industries' ROCE

In a nutshell, Archidply Industries has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 39% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Archidply Industries does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those are significant...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

If you’re looking to trade Archidply Industries, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.