Stock Analysis

The Returns On Capital At Star Paper Mills (NSE:STARPAPER) Don't Inspire Confidence

NSEI:STARPAPER
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There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Star Paper Mills (NSE:STARPAPER) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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 Star Paper Mills, this is the formula:

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

0.11 = ₹677m ÷ (₹7.0b - ₹537m) (Based on the trailing twelve months to September 2022).

Thus, Star Paper Mills has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 13% generated by the Forestry industry.

Check out our latest analysis for Star Paper Mills

roce
NSEI:STARPAPER Return on Capital Employed December 26th 2022

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'd like to look at how Star Paper Mills has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Star Paper Mills' ROCE Trend?

In terms of Star Paper Mills' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 14% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

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, despite the promising trends, the stock has fallen 35% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know more about Star Paper Mills, we've spotted 3 warning signs, and 1 of them can't be ignored.

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.