Investors Could Be Concerned With Star Paper Mills' (NSE:STARPAPER) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Star Paper Mills (NSE:STARPAPER), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Star Paper Mills is:

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

0.05 = ₹298m ÷ (₹6.6b - ₹579m) (Based on the trailing twelve months to December 2021).

So, Star Paper Mills has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 12%.

Check out our latest analysis for Star Paper Mills

Historical performance is a great place to start when researching a stock so above you can see the gauge for Star Paper Mills' ROCE against it's prior returns. If you're interested in investigating Star Paper Mills' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Star Paper Mills Tell Us?

On the surface, the trend of ROCE at Star Paper Mills doesn't inspire confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 5.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Star Paper Mills has done well to pay down its current liabilities to 8.8% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Star Paper Mills' ROCE

While returns have fallen for Star Paper Mills in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, total returns to shareholders over the last five years have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Star Paper Mills (of which 1 is a bit concerning!) that you should know about.

While Star Paper Mills 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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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.