Andhra Paper (NSE:ANDHRAPAP) Shareholders Will Want The ROCE Trajectory To Continue

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. With that in mind, we've noticed some promising trends at Andhra Paper (NSE:ANDHRAPAP) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Andhra Paper, this is the formula:

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

0.12 = ₹1.3b ÷ (₹14b - ₹2.8b) (Based on the trailing twelve months to December 2021).

Thus, Andhra Paper has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Forestry industry average of 10.0%.

See our latest analysis for Andhra Paper

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 Andhra Paper has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Andhra Paper's ROCE Trending?

Investors would be pleased with what's happening at Andhra Paper. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. The amount of capital employed has increased too, by 42%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

One more thing to note, Andhra Paper has decreased current liabilities to 20% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Andhra Paper has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Andhra Paper's ROCE

All in all, it's terrific to see that Andhra Paper is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 27% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching Andhra Paper, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Andhra Paper 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.