Today we are going to look at West Coast Paper Mills Limited (NSE:WSTCSTPAPR) to see whether it might be an attractive investment prospect. 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. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the 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.'
So, How Do We Calculate ROCE?
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 West Coast Paper Mills:
0.27 = ₹3.9b ÷ (₹19b - ₹5.1b) (Based on the trailing twelve months to June 2019.)
So, West Coast Paper Mills has an ROCE of 27%.
Is West Coast Paper Mills's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that West Coast Paper Mills's ROCE is meaningfully better than the 14% average in the Forestry industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, West Coast Paper Mills's ROCE currently appears to be excellent.
Our data shows that West Coast Paper Mills currently has an ROCE of 27%, compared to its ROCE of 14% 3 years ago. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how West Coast Paper Mills's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
West Coast 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. 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.
West Coast Paper Mills has total assets of ₹19b and current liabilities of ₹5.1b. Therefore its current liabilities are equivalent to approximately 27% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.
The Bottom Line On West Coast Paper Mills's ROCE
This is good to see, and with such a high ROCE, West Coast Paper Mills may be worth a closer look. West Coast Paper Mills looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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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.