Here's What To Make Of Irani Papel e Embalagem's (BVMF:RANI3) Returns On Capital

There are a few key trends to look for if we want to identify the next 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Irani Papel e Embalagem (BVMF:RANI3), 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. The formula for this calculation on Irani Papel e Embalagem is:

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

0.089 = R$138m ÷ (R$1.8b - R$281m) (Based on the trailing twelve months to September 2020).

Therefore, Irani Papel e Embalagem has an ROCE of 8.9%. In absolute terms, that's a low return, but it's much better than the Forestry industry average of 6.8%.

View our latest analysis for Irani Papel e Embalagem

In the above chart we have measured Irani Papel e Embalagem'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.

How Are Returns Trending?

There hasn't been much to report for Irani Papel e Embalagem's returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Irani Papel e Embalagem to be a multi-bagger going forward. This probably explains why Irani Papel e Embalagem is paying out 49% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

Our Take On Irani Papel e Embalagem's ROCE

In summary, Irani Papel e Embalagem isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Yet to long term shareholders the stock has gifted them an incredible 103% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 3 warning signs with Irani Papel e Embalagem (at least 2 which are significant) , and understanding them would certainly be useful.

While Irani Papel e Embalagem 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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