Seshasayee Paper and Boards (NSE:SESHAPAPER) Will Want To Turn Around Its Return Trends

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Seshasayee Paper and Boards (NSE:SESHAPAPER) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Seshasayee Paper and Boards:

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

0.055 = ₹710m ÷ (₹15b - ₹2.2b) (Based on the trailing twelve months to March 2021).

Therefore, Seshasayee Paper and Boards has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Forestry industry average of 10%.

Check out our latest analysis for Seshasayee Paper and Boards

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 want to delve into the historical earnings, revenue and cash flow of Seshasayee Paper and Boards, check out these free graphs here.

So How Is Seshasayee Paper and Boards' ROCE Trending?

On the surface, the trend of ROCE at Seshasayee Paper and Boards doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 5.5%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Seshasayee Paper and Boards has decreased its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

We're a bit apprehensive about Seshasayee Paper and Boards because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these poor fundamentals, the stock has gained a huge 283% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Seshasayee Paper and Boards does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

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

When trading Seshasayee Paper and Boards or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St 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. Simply Wall St has no position in any stocks mentioned.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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