Ruchira Papers (NSE:RUCHIRA) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Ruchira Papers (NSE:RUCHIRA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Ruchira Papers, this is the formula:

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

0.098 = ₹329m ÷ (₹4.4b - ₹1.1b) (Based on the trailing twelve months to September 2021).

Thus, Ruchira Papers has an ROCE of 9.8%. Even though it's in line with the industry average of 9.8%, it's still a low return by itself.

Check out our latest analysis for Ruchira Papers

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ruchira Papers' ROCE against it's prior returns. If you'd like to look at how Ruchira Papers has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We weren't thrilled with the trend because Ruchira Papers' ROCE has reduced by 56% over the last five years, while the business employed 72% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Ruchira Papers might not have received a full period of earnings contribution from it.

Our Take On Ruchira Papers' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Ruchira Papers. These growth trends haven't led to growth returns though, since the stock has fallen 20% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 4 warning signs we've spotted with Ruchira Papers (including 1 which is significant) .

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.