Returns On Capital At Clearwater Paper (NYSE:CLW) Paint An Interesting Picture

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Clearwater Paper (NYSE:CLW) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Clearwater Paper, this is the formula:

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

0.083 = US$131m ÷ (US$1.8b - US$240m) (Based on the trailing twelve months to September 2020).

Therefore, Clearwater Paper has an ROCE of 8.3%. In absolute terms, that's a low return but it's around the Forestry industry average of 9.7%.

View our latest analysis for Clearwater Paper

In the above chart we have measured Clearwater Paper's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Clearwater Paper.

What Does the ROCE Trend For Clearwater Paper Tell Us?

There are better returns on capital out there than what we're seeing at Clearwater Paper. The company has employed 22% more capital in the last five years, and the returns on that capital have remained stable at 8.3%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

In summary, Clearwater Paper has simply been reinvesting capital and generating the same low rate of return as before. And in the last five years, the stock has given away 18% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Clearwater Paper has the makings of a multi-bagger.

If you want to know some of the risks facing Clearwater Paper we've found 3 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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