Will TCPL Packaging (NSE:TCPLPACK) Multiply In Value Going Forward?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating TCPL Packaging (NSE:TCPLPACK), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

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 TCPL Packaging is:

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

0.16 = ₹757m ÷ (₹8.3b - ₹3.5b) (Based on the trailing twelve months to December 2020).

Thus, TCPL Packaging has an ROCE of 16%. 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're interested in investigating TCPL Packaging's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For TCPL Packaging Tell Us?

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 27%, but since then they've fallen to 16%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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 can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. 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. And investors appear hesitant that the trends will pick up because the stock has fallen 38% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know more about TCPL Packaging, we've spotted 4 warning signs, and 2 of them shouldn't be ignored.

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.

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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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