This analysis is intended to introduce important early concepts to people who are starting to invest and want a simplistic look at the return on Tamil Nadu Newsprint and Papers Limited (NSE:TNPL) stock.
Tamil Nadu Newsprint and Papers stock represents an ownership share in the company. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Thus, to understand how your money can grow by investing in Tamil Nadu Newsprint and Papers, you need to look at what the company returns to owners for the use of their capital, which can be done in many ways but today we will use return on capital employed (ROCE).
Calculating Return On Capital Employed for TNPL
Choosing to invest in Tamil Nadu Newsprint and Papers comes at the cost of investing in another potentially favourable company. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. To determine Tamil Nadu Newsprint and Papers’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). TNPL’s ROCE is calculated below:
ROCE Calculation for TNPL
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = ₹1.4b ÷ (₹56b – ₹24b) = 12%
The calculation above shows that TNPL’s earnings were 12% of capital employed. A good ROCE hurdle you should aim for in your investments is 15%, which TNPL has just fallen short of, meaning the company creates an unideal amount of earnings from capital employed.
A deeper look
Tamil Nadu Newsprint and Papers’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Tamil Nadu Newsprint and Papers is in an adverse position, but this can change if these factors improve. Because of this, it is important to look beyond the final value of TNPL’s ROCE and understand what is happening to the individual components. Looking three years in the past, it is evident that TNPL’s ROCE has deteriorated from 12%, indicating the company’s capital returns have declined. In this time, earnings have fallen from ₹2.3b to ₹1.4b and capital employed has increased due to a hike in the level of total assets employed , which means the company’s ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.
TNPL’s investors have experienced a downward trend in ROCE and it is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for TNPL’s future growth? Take a look at our free research report of analyst consensus for TNPL’s outlook.
- Valuation: What is TNPL worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether TNPL is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.