Investors Met With Slowing Returns on Capital At Pudumjee Paper Products (NSE:PDMJEPAPER)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Pudumjee Paper Products' (NSE:PDMJEPAPER) trend of ROCE, we liked what we saw.

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

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

0.13 = ₹645m ÷ (₹6.0b - ₹1.2b) (Based on the trailing twelve months to June 2022).

Thus, Pudumjee Paper Products has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Forestry industry average of 12%.

View our latest analysis for Pudumjee Paper Products

Historical performance is a great place to start when researching a stock so above you can see the gauge for Pudumjee Paper Products' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Pudumjee Paper Products, check out these free graphs here.

What Does the ROCE Trend For Pudumjee Paper Products Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 55% more capital in the last five years, and the returns on that capital have remained stable at 13%. Since 13% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Key Takeaway

To sum it up, Pudumjee Paper Products has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Like most companies, Pudumjee Paper Products does come with some risks, and we've found 3 warning signs that you should be aware of.

While Pudumjee Paper Products 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. 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.