Returns On Capital Signal Tricky Times Ahead For TCPL Packaging (NSE:TCPLPACK)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at TCPL Packaging (NSE:TCPLPACK), 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. To calculate this metric for TCPL Packaging, this is the formula:

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

0.17 = ₹863m ÷ (₹9.1b - ₹3.9b) (Based on the trailing twelve months to September 2021).

Thus, TCPL Packaging has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 14% generated by the Packaging industry.

Check out our latest analysis for TCPL Packaging

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at TCPL Packaging doesn't inspire confidence. Over the last five years, returns on capital have decreased to 17% from 23% five years ago. 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.

Another thing to note, TCPL Packaging has a high ratio of current liabilities to total assets of 43%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On TCPL Packaging's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that TCPL Packaging is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 40% to shareholders over the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

TCPL Packaging does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.

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