In This Article:
Today we are going to look at Genus Paper & Boards Limited (NSE:GENUSPAPER) to see whether it might be an attractive investment prospect. 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.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. 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. All else being equal, a better business will have a higher ROCE. 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 Genus Paper & Boards:
0.035 = ₹137m ÷ (₹4.6b - ₹736m) (Based on the trailing twelve months to June 2019.)
So, Genus Paper & Boards has an ROCE of 3.5%.
See our latest analysis for Genus Paper & Boards
Is Genus Paper & Boards's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Genus Paper & Boards's ROCE appears meaningfully below the 13% average reported by the Forestry industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Genus Paper & Boards compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.6% available in government bonds. It is likely that there are more attractive prospects out there.
You can click on the image below to see (in greater detail) how Genus Paper & Boards's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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 Genus Paper & Boards has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.