In This Article:
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%.
View our latest analysis for West Coast Paper Mills
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.