Be Wary Of Genus Paper & Boards (NSE:GENUSPAPER) And Its Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Genus Paper & Boards (NSE:GENUSPAPER), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

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 Genus Paper & Boards:

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

0.016 = ₹60m ÷ (₹4.4b - ₹590m) (Based on the trailing twelve months to September 2020).

So, Genus Paper & Boards has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 8.2%.

View our latest analysis for Genus Paper & Boards

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

What Does the ROCE Trend For Genus Paper & Boards Tell Us?

In terms of Genus Paper & Boards' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 4.8% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. If these trends continue, we wouldn't expect Genus Paper & Boards to turn into a multi-bagger.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. In spite of that, the stock has delivered a 17% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Genus Paper & Boards (including 1 which is makes us a bit uncomfortable) .

While Genus Paper & Boards 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. 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.
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