This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Richards Packaging Income Fund (TSE:RPI.UN).
Buying Richards Packaging Income Fund makes you a partial owner of the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Thus, to understand how your money can grow by investing in Richards Packaging Income Fund, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).
Richards Packaging Income Fund’s Return On Capital Employed
As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. To determine Richards Packaging Income Fund’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). I have calculated Richards Packaging Income Fund’s ROCE for you below:
ROCE Calculation for RPI.UN
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = CA$30.0m ÷ (CA$199.4m – CA$67.4m) = 22.7%
The calculation above shows that RPI.UN’s earnings were 22.7% of capital employed. A good ROCE hurdle you should aim for in your investments is 15%, which is exceeded by RPI.UN and means the company creates a good amount of earnings on capital. If this can be sustained with good reinvestment opportunities or dividend distributions your capital has the potential to compound well over time.
Does this mean I should invest?
Richards Packaging Income Fund’s relatively strong ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Richards Packaging Income Fund is in a favourable position, but this can change if these factors underperform. Because of this, it is important to look beyond the final value of RPI.UN’s ROCE and understand what is happening to the individual components. Looking at the past 3 year period shows us that RPI.UN boosted investor return on capital employed from 12.9%. We can see that earnings have increased from CA$16.4m to CA$30.0m whilst the amount of capital employed also grew but by a proportionally lesser volume, which suggests the larger ROCE is due to a growth in earnings relative to capital requirements.
ROCE for RPI.UN investors has grown in the last few years and is currently at a level that makes the company an attractive candidate that is capable of producing solid capital returns, and hence, an attractive return on investment. This makes the company an attractive place to put your money, but ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation. It’s important to account for these factors because you cannot be sure if this trend will continue or if you are getting a good deal for the future returns you are paying for. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for RPI.UN’s future growth? Take a look at our free research report of analyst consensus for RPI.UN’s outlook.
- Valuation: What is RPI.UN worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether RPI.UN is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.