How Has Genus Paper & Boards (NSE:GENUSPAPER) Allocated Its Capital?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Genus Paper & Boards (NSE:GENUSPAPER) we aren't filled with optimism, but let's investigate further.

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. 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).

Therefore, Genus Paper & Boards has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 9.3%.

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

What Can We Tell From Genus Paper & Boards' ROCE Trend?

There is reason to be cautious about Genus Paper & Boards, given the returns are trending downwards. To be more specific, the ROCE was 4.2% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Genus Paper & Boards becoming one if things continue as they have.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 97% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Genus Paper & Boards does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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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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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