In This Article:
Today we'll look at Astron Paper & Board Mill Limited (NSE:ASTRON) 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 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.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from 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.
How Do You Calculate Return On Capital Employed?
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 Astron Paper & Board Mill:
0.27 = ₹472m ÷ (₹3.1b - ₹1.4b) (Based on the trailing twelve months to June 2019.)
Therefore, Astron Paper & Board Mill has an ROCE of 27%.
View our latest analysis for Astron Paper & Board Mill
Does Astron Paper & Board Mill Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, Astron Paper & Board Mill's ROCE is meaningfully higher than the 13% average in the Forestry industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, Astron Paper & Board Mill's ROCE currently appears to be excellent.
Our data shows that Astron Paper & Board Mill currently has an ROCE of 27%, compared to its ROCE of 21% 3 years ago. This makes us think the business might be improving. The image below shows how Astron Paper & Board Mill's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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 Astron Paper & Board Mill has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.