Tamil Nadu Newsprint and Papers (NSE:TNPL) Will Be Looking To Turn Around Its Returns

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. 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. To calculate this metric for Tamil Nadu Newsprint and Papers, this is the formula:

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

0.014 = ₹549m ÷ (₹64b - ₹24b) (Based on the trailing twelve months to September 2021).

Therefore, Tamil Nadu Newsprint and Papers has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 10.0%.

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 want to delve into the historical earnings, revenue and cash flow of Tamil Nadu Newsprint and Papers, check out these free graphs here.

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. To be more specific, the ROCE was 13% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Tamil Nadu Newsprint and Papers to turn into a multi-bagger.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 58% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Tamil Nadu Newsprint and Papers (2 are potentially serious) you should be aware of.

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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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.