Returns On Capital Signal Tricky Times Ahead For Kuantum Papers (NSE:KUANTUM)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Kuantum Papers (NSE:KUANTUM), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Kuantum Papers:

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

0.048 = ₹728m ÷ (₹17b - ₹1.7b) (Based on the trailing twelve months to March 2022).

So, Kuantum Papers has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Forestry industry average of 12%.

Check out our latest analysis for Kuantum Papers

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kuantum Papers' ROCE against it's prior returns. If you'd like to look at how Kuantum Papers has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Kuantum Papers' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 12% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kuantum Papers. And the stock has followed suit returning a meaningful 8.1% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know more about Kuantum Papers, we've spotted 4 warning signs, and 2 of them don't sit too well with us.

While Kuantum Papers 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. 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.