What Do The Returns On Capital At Mold-Tek Packaging (NSE:MOLDTKPAC) Tell Us?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Mold-Tek Packaging (NSE:MOLDTKPAC), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Mold-Tek Packaging, this is the formula:

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

0.20 = ₹473m ÷ (₹3.6b - ₹1.3b) (Based on the trailing twelve months to June 2020).

Therefore, Mold-Tek Packaging has an ROCE of 20%. On its own, that's a standard return, however it's much better than the 12% generated by the Packaging industry.

View our latest analysis for Mold-Tek Packaging

In the above chart we have a measured Mold-Tek Packaging's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Mold-Tek Packaging's ROCE Trend?

On the surface, the trend of ROCE at Mold-Tek Packaging doesn't inspire confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 20%. However it looks like Mold-Tek Packaging might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Mold-Tek Packaging's current liabilities have increased over the last five years to 35% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Mold-Tek Packaging's ROCE

In summary, Mold-Tek Packaging is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park delivering a 180% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 3 warning signs for Mold-Tek Packaging you'll probably want to know about.

While Mold-Tek Packaging isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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