Archidply Industries (NSE:ARCHIDPLY) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Archidply Industries' (NSE:ARCHIDPLY) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Archidply Industries:

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

0.19 = ₹206m ÷ (₹2.4b - ₹1.4b) (Based on the trailing twelve months to December 2022).

Thus, Archidply Industries has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 16% generated by the Forestry industry.

Check out our latest analysis for Archidply Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Archidply Industries' ROCE against it's prior returns. If you'd like to look at how Archidply Industries 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 Archidply Industries' ROCE Trend?

Archidply Industries has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 39%. The company is now earning ₹0.2 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 22% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Archidply Industries may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, Archidply Industries' current liabilities are still rather high at 56% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Archidply Industries' ROCE

In a nutshell, we're pleased to see that Archidply Industries has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 22% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know about the risks facing Archidply Industries, we've discovered 2 warning signs that you should be aware of.

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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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.