# Avon Moldplast Limited (NSE:AVONMPL): The Return Story

This analysis is intended to introduce important early concepts to people who are starting to invest and looking to gauge the potential return on investment in Avon Moldplast Limited (NSE:AVONMPL).

Purchasing Avon Moldplast gives you an ownership stake in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. Your return is tied to AVONMPL’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently Avon Moldplast is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

### Calculating Return On Capital Employed for AVONMPL

Choosing to invest in Avon Moldplast comes at the cost of investing in another potentially favourable company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. We’ll look at Avon Moldplast’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. AVONMPL’s ROCE is calculated below:

ROCE Calculation for AVONMPL

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = ₹12m ÷ (₹157m – ₹72m) = 17%

The calculation above shows that AVONMPL’s earnings were 17% of capital employed. This makes Avon Moldplast satisfactorily profitable when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future and is able to either provide solid dividends or reinvestment opportunities, your capital will enlarge at a favourable rate over time.

### Can any of this change?

AVONMPL is efficient with the use of capital, but this is only the case if AVONMPL continues to maintain the presently healthy ROCE, which will change if the company either earns less or requires more capital to create earnings. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. If you go back three years, you’ll find that AVONMPL’s ROCE has increased from 7.9%. Similarly, the movement in the earnings variable shows a jump from ₹520k to ₹12m 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.

### Next Steps

Avon Moldplast’s ROCE has increased in the recent past and is above a benchmark that makes the company a potentially attractive stock that can achieve a solid return on investment. This is an ideal situation to be in, but return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. If you don’t pay attention to these factors 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. Avon Moldplast’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.

1. Future Outlook: What are well-informed industry analysts predicting for AVONMPL’s future growth? Take a look at our free research report of analyst consensus for AVONMPL’s outlook.
2. Valuation: What is AVONMPL 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 AVONMPL is currently mispriced by the market.
3. 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 editorial-team@simplywallst.com.