Investors Will Want Paramount Communications' (NSE:PARACABLES) Growth In ROCE To Persist

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So when we looked at Paramount Communications (NSE:PARACABLES) and its trend of ROCE, we really liked what we saw.

Understanding 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 Paramount Communications, this is the formula:

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

0.02 = ₹75m ÷ (₹4.7b - ₹909m) (Based on the trailing twelve months to March 2021).

Thus, Paramount Communications has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 10%.

Check out our latest analysis for Paramount Communications

Historical performance is a great place to start when researching a stock so above you can see the gauge for Paramount Communications' ROCE against it's prior returns. If you're interested in investigating Paramount Communications' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The fact that Paramount Communications is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses four years ago, but now it's earning 2.0% which is a sight for sore eyes. In addition to that, Paramount Communications is employing 113% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 19%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On Paramount Communications' ROCE

In summary, it's great to see that Paramount Communications has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Paramount Communications (of which 1 makes us a bit uncomfortable!) that you should know about.

While Paramount Communications 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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