What Should Investors Know About Pudumjee Paper Products Limited's (NSE:PDMJEPAPER) Return On Capital?

By
Simply Wall St
Published
July 19, 2018
NSEI:PDMJEPAPER

This article is intended for those of you who are at the beginning of your investing journey and looking to gauge the potential return on investment in Pudumjee Paper Products Limited (NSE:PDMJEPAPER).

Pudumjee Paper Products stock represents an ownership share in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Therefore, looking at how efficiently Pudumjee Paper Products is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

View our latest analysis for Pudumjee Paper Products

ROCE: Explanation and Calculation

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. The cost of missing out on another opportunity comes in the form of the potential long term gain you could've received, which is dependent on the gap between the return on capital you could've achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. We'll look at Pudumjee Paper Products’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. Take a look at the formula box beneath:

ROCE Calculation for PDMJEPAPER

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets - Current Liabilities)

∴ ROCE = ₹300.39m ÷ (₹4.44b - ₹1.40b) = 9.88%

As you can see, PDMJEPAPER earned ₹9.9 from every ₹100 you invested over the previous twelve months. This makes Pudumjee Paper Products unattractive when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital will be able to compound over time, but not to the extent investors should be aiming for.

NSEI:PDMJEPAPER Last Perf July 19th 18
NSEI:PDMJEPAPER Last Perf July 19th 18

Then why have investors invested?

PDMJEPAPER doesn't return an attractive amount on capital, but this will only continue if the company is unable to increase earnings or decrease current capital requirements. Because of this, it is important to look beyond the final value of PDMJEPAPER’s ROCE and understand what is happening to the individual components. Looking at the past 3 year period shows us that PDMJEPAPER boosted investor return on capital employed from 5.63%. Similarly, the movement in the earnings variable shows a jump from ₹692.00k to ₹300.39m whilst capital employed also increased but to a smaller extent, which means the company has been able to improve ROCE by driving up earnings relative to the capital invested in the business.

Next Steps

ROCE for PDMJEPAPER investors is below the desired level at the moment, however, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. It is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as the management team and valuation to determine whether there is potential for return by focusing our attention elsewhere. Pudumjee Paper Products's fundamentals can be explored with the links I've provided below if you are interested, otherwise you can start looking at other high-performing stocks.

  1. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for Pudumjee Paper Products's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  2. Valuation: What is PDMJEPAPER worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether PDMJEPAPER is currently undervalued by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St has no position in any of the companies mentioned. This article is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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