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

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Tamil Nadu Newsprint and Papers (NSE:TNPL), we weren't too hopeful.

Return On Capital Employed (ROCE): What Is It?

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)

0.091 = ₹3.1b ÷ (₹61b - ₹27b) (Based on the trailing twelve months to September 2024).

Thus, Tamil Nadu Newsprint and Papers has an ROCE of 9.1%. In absolute terms, that's a low return but it's around the Forestry industry average of 10%.

View 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'd like to look at how Tamil Nadu Newsprint and Papers has performed in the past in other metrics, you can view this free graph of Tamil Nadu Newsprint and Papers' past earnings, revenue and cash flow.

What Can We Tell From Tamil Nadu Newsprint and Papers' ROCE Trend?

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 18%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Tamil Nadu Newsprint and Papers to turn into a multi-bagger.

On a side note, Tamil Nadu Newsprint and Papers' current liabilities are still rather high at 44% 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 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. Despite the concerning underlying trends, the stock has actually gained 5.2% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing: We've identified 3 warning signs with Tamil Nadu Newsprint and Papers (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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

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.