Evaluating Emami Paper Mills Limited’s (NSE:EMAMIPAP) Investments In Its Business
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Today we'll look at Emami Paper Mills Limited (NSE:EMAMIPAP) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
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 Emami Paper Mills:
0.16 = ₹1.9b ÷ (₹21b - ₹8.7b) (Based on the trailing twelve months to March 2019.)
Therefore, Emami Paper Mills has an ROCE of 16%.
Check out our latest analysis for Emami Paper Mills
Does Emami Paper Mills Have A Good ROCE?
One way to assess ROCE is to compare similar companies. It appears that Emami Paper Mills's ROCE is fairly close to the Forestry industry average of 14%. Independently of how Emami Paper Mills compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Our data shows that Emami Paper Mills currently has an ROCE of 16%, compared to its ROCE of 1.7% 3 years ago. This makes us think the business might be improving.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. If Emami Paper Mills is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Emami Paper Mills's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Emami Paper Mills has total assets of ₹21b and current liabilities of ₹8.7b. As a result, its current liabilities are equal to approximately 41% of its total assets. With this level of current liabilities, Emami Paper Mills's ROCE is boosted somewhat.
Our Take On Emami Paper Mills's ROCE
Emami Paper Mills's ROCE does look good, but the level of current liabilities also contribute to that. Emami Paper Mills 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.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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 editorial-team@simplywallst.com. 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.
