Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. That's why when we briefly looked at Arctic Paper's (WSE:ATC) ROCE trend, we were pretty happy with what we saw.
What is Return On Capital Employed (ROCE)?
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. To calculate this metric for Arctic Paper, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = zł160m ÷ (zł2.0b - zł567m) (Based on the trailing twelve months to June 2020).
So, Arctic Paper has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Forestry industry average of 6.8% it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Arctic Paper's ROCE against it's prior returns. If you're interested in investigating Arctic Paper's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Arctic Paper's ROCE Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 11% and the business has deployed 31% more capital into its operations. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 28% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
What We Can Learn From Arctic Paper's ROCE
The main thing to remember is that Arctic Paper has proven its ability to continually reinvest at respectable rates of return. And the stock has followed suit returning a meaningful 55% to shareholders over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
On a final note, we've found 3 warning signs for Arctic Paper that we think you should be aware of.
While Arctic Paper 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.
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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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