Genus Paper & Boards' (NSE:GENUSPAPER) Returns On Capital Tell Us There Is Reason To Feel Uneasy

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Genus Paper & Boards (NSE:GENUSPAPER), we weren't too hopeful.

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. The formula for this calculation on Genus Paper & Boards is:

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

0.029 = ₹110m ÷ (₹4.4b - ₹590m) (Based on the trailing twelve months to December 2020).

Thus, Genus Paper & Boards has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Forestry industry average of 10%.

See our latest analysis for Genus Paper & Boards

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 want to delve into the historical earnings, revenue and cash flow of Genus Paper & Boards, check out these free graphs here.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Genus Paper & Boards. To be more specific, the ROCE was 4.2% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Genus Paper & Boards to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Genus Paper & Boards is generating lower returns from the same amount of capital. Since the stock has skyrocketed 117% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 4 warning signs for Genus Paper & Boards (1 is a bit unpleasant) you should be aware of.

While Genus Paper & Boards isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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