I am writing today to help inform people who are new to the stock market and want to begin learning the link between KPR Mill Limited (NSE:KPRMILL)’s return fundamentals and stock market performance.
Buying K.P.R. Mill makes you a partial owner of the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. Your return is tied to KPRMILL’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 K.P.R. Mill 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 KPRMILL
Choosing to invest in K.P.R. Mill comes at the cost of investing in another potentially favourable 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. We’ll look at K.P.R. Mill’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. I have calculated K.P.R. Mill’s ROCE for you below:
ROCE Calculation for KPRMILL
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = ₹4.3b ÷ (₹24.0b – ₹5.9b) = 24%
As you can see, KPRMILL earned ₹23.5 from every ₹100 you invested over the previous twelve months. This makes K.P.R. Mill attractively 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 quick rate over time.
Can any of this change?
KPRMILL is efficient with the use of capital, but this is only the case if KPRMILL continues to maintain the presently healthy ROCE, which will change if the company either earns less or requires more capital to create earnings. Because of this, it is important to look beyond the final value of KPRMILL’s ROCE and understand what is happening to the individual components. Looking at the past 3 year period shows us that KPRMILL boosted investor return on capital employed from 19%. With this, the current earnings of ₹4.3b improved from ₹2.6b and capital employed improved as well albeit by a relatively smaller amount, signifying ROCE increased as a result of a greater surge in earnings compared to the business’ use of capital.
ROCE for KPRMILL 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. 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. 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 KPRMILL’s future growth? Take a look at our free research report of analyst consensus for KPRMILL’s outlook.
- Valuation: What is KPRMILL 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 KPRMILL 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 email@example.com.