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. 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. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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 Genus Paper & Boards:
0.065 = ₹233m ÷ (₹5.0b – ₹1.0b) (Based on the trailing twelve months to September 2018.)
So, Genus Paper & Boards has an ROCE of 6.5%.
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Does Genus Paper & Boards Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Genus Paper & Boards’s ROCE appears to be significantly below the 13% average in the Forestry industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Genus Paper & Boards’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
Our data shows that Genus Paper & Boards currently has an ROCE of 6.5%, compared to its ROCE of 4.8% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.
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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Genus Paper & Boards is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.