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Today we are going to look at Astron Paper & Board Mill Limited (NSE:ASTRON) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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?

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 Astron Paper & Board Mill:

0.29 = ₹472m ÷ (₹2.8b - ₹1.2b) (Based on the trailing twelve months to December 2018.)

So, Astron Paper & Board Mill has an ROCE of 29%.

See our latest analysis for Astron Paper & Board Mill

Is Astron Paper & Board Mill's ROCE Good?

One way to assess ROCE is to compare similar companies. In our analysis, Astron Paper & Board Mill's ROCE is meaningfully higher than the 16% 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, Astron Paper & Board Mill's ROCE currently appears to be excellent.

As we can see, Astron Paper & Board Mill currently has an ROCE of 29% compared to its ROCE 3 years ago, which was 22%. This makes us think about whether the company has been reinvesting shrewdly.

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. ROCE is only a point-in-time measure. You can check if Astron Paper & Board Mill has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Astron Paper & Board Mill's 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 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.

Astron Paper & Board Mill has total assets of ₹2.8b and current liabilities of ₹1.2b. Therefore its current liabilities are equivalent to approximately 41% of its total assets. A medium level of current liabilities boosts Astron Paper & Board Mill's ROCE somewhat.

The Bottom Line On Astron Paper & Board Mill's ROCE

Still, it has a high ROCE, and may be an interesting prospect for further research. Of course you might be able to find a better stock than Astron Paper & Board Mill. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like Astron Paper & Board Mill better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.