Will Emami Paper Mills' (NSE:EMAMIPAP) Growth In ROCE Persist?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in Emami Paper Mills' (NSE:EMAMIPAP) returns on capital, so let's have a look.

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. To calculate this metric for Emami Paper Mills, this is the formula:

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

0.15 = ₹1.6b ÷ (₹19b - ₹8.4b) (Based on the trailing twelve months to June 2020).

Thus, Emami Paper Mills 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.

Check out our latest analysis for Emami Paper Mills

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

So How Is Emami Paper Mills' ROCE Trending?

Emami Paper Mills is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 663% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 44% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Emami Paper Mills' ROCE

As discussed above, Emami Paper Mills appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And since the stock has fallen 28% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Emami Paper Mills (of which 2 are a bit concerning!) that you should know about.

While Emami Paper Mills 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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