Be Wary Of Astron Paper & Board Mill (NSE:ASTRON) And Its Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Astron Paper & Board Mill (NSE:ASTRON), the trends above didn't look too great.

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. The formula for this calculation on Astron Paper & Board Mill is:

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

0.021 = ₹33m ÷ (₹3.0b - ₹1.5b) (Based on the trailing twelve months to December 2023).

Therefore, Astron Paper & Board Mill has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Forestry industry average of 12%.

View our latest analysis for Astron Paper & Board Mill

Historical performance is a great place to start when researching a stock so above you can see the gauge for Astron Paper & Board Mill's ROCE against it's prior returns. If you're interested in investigating Astron Paper & Board Mill's past further, check out this free graph covering Astron Paper & Board Mill's past earnings, revenue and cash flow.

The Trend Of ROCE

There is reason to be cautious about Astron Paper & Board Mill, given the returns are trending downwards. To be more specific, the ROCE was 29% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Astron Paper & Board Mill becoming one if things continue as they have.

Another thing to note, Astron Paper & Board Mill has a high ratio of current liabilities to total assets of 48%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, it's unfortunate that Astron Paper & Board Mill is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 79% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 3 warning signs for Astron Paper & Board Mill (2 are concerning) 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.