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Clearwater Paper (NYSE:CLW) Has Some Difficulty Using Its Capital Effectively

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When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Clearwater Paper (NYSE:CLW), so let's see why.

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. The formula for this calculation on Clearwater Paper is:

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

0.048 = US$69m ÷ (US$1.7b - US$256m) (Based on the trailing twelve months to March 2022).

Therefore, Clearwater Paper has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Forestry industry average of 25%.

Check out our latest analysis for Clearwater Paper

roce
roce

Above you can see how the current ROCE for Clearwater Paper compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Clearwater Paper here for free.

The Trend Of ROCE

In terms of Clearwater Paper's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 6.7%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Clearwater Paper to turn into a multi-bagger.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 25% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Clearwater Paper does have some risks, we noticed 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

While Clearwater 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.

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.