Should You Be Impressed By Star Paper Mills' (NSE:STARPAPER) Returns on Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Star Paper Mills (NSE:STARPAPER), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Star Paper Mills, this is the formula:

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

0.03 = ₹171m ÷ (₹6.3b - ₹550m) (Based on the trailing twelve months to September 2020).

Therefore, Star Paper Mills has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Forestry industry average of 9.7%.

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

How Are Returns Trending?

When we looked at the ROCE trend at Star Paper Mills, we didn't gain much confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 3.0%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Star Paper Mills has decreased its current liabilities to 8.7% of total assets. So we could link some of this to the decrease in ROCE. 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

In summary, we're somewhat concerned by Star Paper Mills' diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 304%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Star Paper Mills does have some risks though, and we've spotted 5 warning signs for Star Paper Mills that you might be interested in.

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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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.
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