Stock Analysis

Orient Paper & Industries (NSE:ORIENTPPR) Might Be Having Difficulty Using Its Capital Effectively

NSEI:ORIENTPPR
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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after briefly looking over the numbers, we don't think Orient Paper & Industries (NSE:ORIENTPPR) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. To calculate this metric for Orient Paper & Industries, this is the formula:

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

0.045 = ₹916m ÷ (₹24b - ₹3.4b) (Based on the trailing twelve months to December 2023).

Thus, Orient Paper & Industries has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 13%.

Check out our latest analysis for Orient Paper & Industries

roce
NSEI:ORIENTPPR Return on Capital Employed February 13th 2024

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

So How Is Orient Paper & Industries' ROCE Trending?

On the surface, the trend of ROCE at Orient Paper & Industries doesn't inspire confidence. Around five years ago the returns on capital were 6.5%, but since then they've fallen to 4.5%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Orient Paper & Industries' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 71% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing, we've spotted 1 warning sign facing Orient Paper & Industries that you might find interesting.

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

Valuation is complex, but we're helping make it simple.

Find out whether Orient Paper & Industries is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.