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Malu Paper Mills Limited (NSE:MALUPAPER) Earns A Nice Return On Capital Employed

Simply Wall St

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Today we'll look at Malu Paper Mills Limited (NSE:MALUPAPER) 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

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. 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.'

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for Malu Paper Mills:

0.45 = ₹198m ÷ (₹1.4b - ₹960m) (Based on the trailing twelve months to March 2019.)

So, Malu Paper Mills has an ROCE of 45%.

See our latest analysis for Malu Paper Mills

Is Malu Paper Mills's ROCE Good?

One way to assess ROCE is to compare similar companies. In our analysis, Malu Paper Mills's ROCE is meaningfully higher than the 14% average in the Forestry industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, Malu Paper Mills's ROCE is currently very good.

As we can see, Malu Paper Mills currently has an ROCE of 45% compared to its ROCE 3 years ago, which was 17%. This makes us think the business might be improving.

NSEI:MALUPAPER Past Revenue and Net Income, June 18th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. You can check if Malu Paper Mills has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Malu Paper Mills's Current Liabilities And Their Impact On Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Malu Paper Mills has total liabilities of ₹960m and total assets of ₹1.4b. As a result, its current liabilities are equal to approximately 68% of its total assets. Malu Paper Mills's high level of current liabilities boost the ROCE - but its ROCE is still impressive.

Our Take On Malu Paper Mills's ROCE

So we would be interested in doing more research here -- there may be an opportunity! Malu 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.