Tamil Nadu Newsprint and Papers' (NSE:TNPL) Returns On Capital Not Reflecting Well On The Business

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Tamil Nadu Newsprint and Papers (NSE:TNPL), the trends above didn't look too great.

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. Analysts use this formula to calculate it for Tamil Nadu Newsprint and Papers:

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

0.027 = ₹837m ÷ (₹58b - ₹27b) (Based on the trailing twelve months to December 2020).

So, Tamil Nadu Newsprint and Papers has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Forestry industry average of 11%.

See our latest analysis for Tamil Nadu Newsprint and Papers

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

How Are Returns Trending?

In terms of Tamil Nadu Newsprint and Papers' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 12%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Tamil Nadu Newsprint and Papers becoming one if things continue as they have.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 47%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 2.7%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On Tamil Nadu Newsprint and Papers' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 42% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Tamil Nadu Newsprint and Papers does have some risks, we noticed 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.

While Tamil Nadu Newsprint and Papers 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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