JK Paper (NSE:JKPAPER) Is Very Good At Capital Allocation

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 JK Paper's (NSE:JKPAPER) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for JK Paper, this is the formula:

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

0.23 = ₹18b ÷ (₹92b - ₹16b) (Based on the trailing twelve months to September 2023).

Thus, JK Paper has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Forestry industry average of 13%.

See our latest analysis for JK Paper

Above you can see how the current ROCE for JK Paper compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering JK Paper here for free.

So How Is JK Paper's ROCE Trending?

Investors would be pleased with what's happening at JK Paper. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 135% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From JK Paper's ROCE

To sum it up, JK Paper has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we found 2 warning signs for JK Paper (1 doesn't sit too well with us) you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.