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. 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 of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Understanding 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. 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:
0.20 = ₹2.5b ÷ (₹16b – ₹3.8b) (Based on the trailing twelve months to March 2018.)
Therefore, West Coast Paper Mills has an ROCE of 20%.
Check out our latest analysis for West Coast Paper Mills
Want to help shape the future of investing tools and platforms? Take the survey and be part of one of the most advanced studies of stock market investors to date.
Does West Coast Paper Mills Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that West Coast Paper Mills’s ROCE is meaningfully better 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 where West Coast Paper Mills sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
As we can see, West Coast Paper Mills currently has an ROCE of 20% compared to its ROCE 3 years ago, which was 11%. This makes us think the business might be improving.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for West Coast Paper Mills.