We Like These Underlying Return On Capital Trends At Paramount Communications (NSE:PARACABLES)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Speaking of which, we noticed some great changes in Paramount Communications' (NSE:PARACABLES) returns on capital, so let's have a look.

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. The formula for this calculation on Paramount Communications is:

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

0.029 = ₹109m ÷ (₹4.8b - ₹1.1b) (Based on the trailing twelve months to March 2022).

Thus, Paramount Communications has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Electrical industry average of 12%.

View our latest analysis for Paramount Communications

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Paramount Communications' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Paramount Communications has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 2.9% on its capital. And unsurprisingly, like most companies trying to break into the black, Paramount Communications is utilizing 107% more capital than it was five years ago. 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 23%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Paramount Communications has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

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 a remarkable 147% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Paramount Communications does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.