Today we'll look at Astron Paper & Board Mill Limited (NSE:ASTRON) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Astron Paper & Board Mill:
0.27 = ₹472m ÷ (₹3.1b - ₹1.4b) (Based on the trailing twelve months to June 2019.)
Therefore, Astron Paper & Board Mill has an ROCE of 27%.
Does Astron Paper & Board Mill Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, Astron Paper & Board Mill's ROCE is meaningfully higher than the 13% average in the Forestry industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, Astron Paper & Board Mill's ROCE currently appears to be excellent.
Our data shows that Astron Paper & Board Mill currently has an ROCE of 27%, compared to its ROCE of 21% 3 years ago. This makes us think the business might be improving. The image below shows how Astron Paper & Board Mill's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Astron Paper & Board Mill has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Astron Paper & Board Mill's Current Liabilities And Their Impact On Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
Astron Paper & Board Mill has total liabilities of ₹1.4b and total assets of ₹3.1b. Therefore its current liabilities are equivalent to approximately 44% of its total assets. Astron Paper & Board Mill's ROCE is boosted somewhat by its middling amount of current liabilities.
Our Take On Astron Paper & Board Mill's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Astron Paper & Board Mill shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
Astron Paper & Board Mill is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.