Here’s What’s Happening With Returns At Okayama Paper Industries (TYO:3892)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Okayama Paper Industries (TYO:3892) and its trend of ROCE, we really liked what we saw.

What is 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. The formula for this calculation on Okayama Paper Industries is:

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

0.10 = JP¥1.0b ÷ (JP¥13b - JP¥3.0b) (Based on the trailing twelve months to November 2020).

Therefore, Okayama Paper Industries has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.6% generated by the Packaging industry.

See our latest analysis for Okayama Paper Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Okayama Paper Industries' ROCE against it's prior returns. If you'd like to look at how Okayama Paper Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Okayama Paper Industries' ROCE Trend?

Okayama Paper Industries' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 662% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

What We Can Learn From Okayama Paper Industries' ROCE

As discussed above, Okayama Paper Industries appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Okayama Paper Industries does have some risks though, and we've spotted 1 warning sign for Okayama Paper Industries that you might be interested in.

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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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