We Like These Underlying Return On Capital Trends At Pudumjee Paper Products (NSE:PDMJEPAPER)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. With that in mind, we've noticed some promising trends at Pudumjee Paper Products (NSE:PDMJEPAPER) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Pudumjee Paper Products is:

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

0.17 = ₹754m ÷ (₹5.3b - ₹929m) (Based on the trailing twelve months to September 2021).

So, Pudumjee Paper Products has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 9.8% generated by the Forestry industry.

See our latest analysis for Pudumjee Paper Products

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Pudumjee Paper Products' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Pudumjee Paper Products' ROCE Trend?

We like the trends that we're seeing from Pudumjee Paper Products. The data shows that returns on capital have increased substantially over the last five years to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 43%. So we're very much inspired by what we're seeing at Pudumjee Paper Products thanks to its ability to profitably reinvest capital.

The Key Takeaway

In summary, it's great to see that Pudumjee Paper Products can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. 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.

Pudumjee Paper Products does have some risks though, and we've spotted 3 warning signs for Pudumjee Paper Products that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.