Will Paramount Communications' (NSE:PARACABLES) Growth In ROCE Persist?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Paramount Communications (NSE:PARACABLES) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

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 Paramount Communications is:

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

0.044 = ₹166m ÷ (₹5.0b - ₹1.3b) (Based on the trailing twelve months to September 2020).

Thus, Paramount Communications has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Electrical industry average of 11%.

See 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'd like to look at how Paramount Communications has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Paramount Communications' ROCE Trend?

We're delighted to see that Paramount Communications is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses three years ago, but now it's earning 4.4% which is a sight for sore eyes. Not only that, but the company is utilizing 64% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 25%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

In Conclusion...

Overall, Paramount Communications gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 136% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Paramount Communications can keep these trends up, it could have a bright future ahead.

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.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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