What Do The Returns On Capital At Seshasayee Paper and Boards (NSE:SESHAPAPER) Tell Us?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Seshasayee Paper and Boards (NSE:SESHAPAPER) 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?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Seshasayee Paper and Boards, this is the formula:

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

0.087 = ₹1.1b ÷ (₹15b - ₹2.4b) (Based on the trailing twelve months to December 2020).

So, Seshasayee Paper and Boards has an ROCE of 8.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.3%.

View our latest analysis for Seshasayee Paper and Boards

Historical performance is a great place to start when researching a stock so above you can see the gauge for Seshasayee Paper and Boards' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Seshasayee Paper and Boards, check out these free graphs here.

What Does the ROCE Trend For Seshasayee Paper and Boards Tell Us?

In terms of Seshasayee Paper and Boards' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.7% for the last five years, and the capital employed within the business has risen 74% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Seshasayee Paper and Boards has done well to reduce current liabilities to 16% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line On Seshasayee Paper and Boards' ROCE

In summary, Seshasayee Paper and Boards has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 261% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a separate note, we've found 1 warning sign for Seshasayee Paper and Boards you'll probably want to know about.

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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