Our Take On The Returns On Capital At Papyless (TYO:3641)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, while the ROCE is currently high for Papyless (TYO:3641), we aren't jumping out of our chairs because returns are decreasing.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Papyless:

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

0.26 = JP¥2.1b ÷ (JP¥15b - JP¥6.3b) (Based on the trailing twelve months to September 2020).

Thus, Papyless has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.

Check out our latest analysis for Papyless

Historical performance is a great place to start when researching a stock so above you can see the gauge for Papyless' ROCE against it's prior returns. If you're interested in investigating Papyless' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Papyless' ROCE Trending?

On the surface, the trend of ROCE at Papyless doesn't inspire confidence. Historically returns on capital were even higher at 32%, but they have dropped over the last four years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a separate but related note, it's important to know that Papyless has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that Papyless is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 170% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing, we've spotted 1 warning sign facing Papyless that you might find interesting.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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