TCPL Packaging (NSE:TCPLPACK) Could Be Struggling To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. In light of that, when we looked at TCPL Packaging (NSE:TCPLPACK) and its ROCE trend, we weren't exactly thrilled.

What is 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 TCPL Packaging, this is the formula:

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

0.17 = ₹820m ÷ (₹8.4b - ₹3.5b) (Based on the trailing twelve months to March 2021).

Therefore, TCPL Packaging has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Packaging industry average of 13% it's much better.

View 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.

How Are Returns Trending?

When we looked at the ROCE trend at TCPL Packaging, we didn't gain much confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 17%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, TCPL Packaging's current liabilities are still rather high at 42% of total assets. 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

Bringing it all together, while we're somewhat encouraged by TCPL Packaging's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 27% over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

TCPL Packaging does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those can't be ignored...

While TCPL Packaging 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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