Will the Promising Trends At Pudumjee Paper Products (NSE:PDMJEPAPER) Continue?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Pudumjee Paper Products' (NSE:PDMJEPAPER) returns on capital, so let's have a look.

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 Pudumjee Paper Products, this is the formula:

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

0.10 = ₹380m ÷ (₹4.8b - ₹1.0b) (Based on the trailing twelve months to September 2020).

So, Pudumjee Paper Products has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Forestry industry average of 9.4%.

Check out 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'd like to look at how Pudumjee Paper Products has performed in the past in other metrics, you can view 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. Over the last five years, returns on capital employed have risen substantially to 10%. The amount of capital employed has increased too, by 149%. So we're very much inspired by what we're seeing at Pudumjee Paper Products thanks to its ability to profitably reinvest capital.

In Conclusion...

All in all, it's terrific to see that Pudumjee Paper Products is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 16% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know about the risks facing Pudumjee Paper Products, we've discovered 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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