Okayama Paper Industries (TSE:3892) Is Looking To Continue Growing Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Okayama Paper Industries (TSE:3892) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Okayama Paper Industries, this is the formula:

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

0.11 = JP¥1.3b ÷ (JP¥16b - JP¥3.6b) (Based on the trailing twelve months to November 2023).

Thus, Okayama Paper Industries has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Packaging industry average of 5.1% it's much better.

Check out our latest analysis for Okayama Paper Industries

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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 Okayama Paper Industries' past earnings, revenue and cash flow.

The Trend Of ROCE

We like the trends that we're seeing from Okayama Paper Industries. Over the last five years, returns on capital employed have risen substantially to 11%. The amount of capital employed has increased too, by 31%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In Conclusion...

All in all, it's terrific to see that Okayama Paper Industries is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 150% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 2 warning signs facing Okayama Paper Industries that you might find interesting.

While Okayama Paper Industries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.