Is RMTL moving into Value Added Product Category? An analysis of ROIIC

Is RMTL moving into Value Added Product Category? An analysis of ROIIC

Value Added Product (VAP) is an important source of higher profitability for any company. But, few companies have only promised VAP and profits are not really coming. Hence, to understand the VAP category, an analysis of ROIIC will be useful as shown in the table below:

This table presented, contains all the factual explanation which will justify how RMTL is consistently adding VAP Category to its product portfolio mix.

ROIIC of this company have never been consistent. Reason? Company is operating into Commodity and Cyclical business. These kind of businesses face ups and downs in Revenue & NOPAT growth. Even if the Investments rise (I.C.), NOPAT might not rise or even fall. The above specific issue has led to inconsistent ROIIC Margins across years for RMTL. Hence, we need to understanding VAP category’s profitability through a different perspective. We analyse it through adjusted formula (different from ROIIC) as given below:

  • Adjusted Formula: C.Y. NOPAT/Last Year Invested Capital (all on total basis).

The above formula will remove unnecessary vague results due to growth and de-growth in NOPAT & Revenues. However, despite adjusted formula, there will still remain one inconsistent issue i.e. during de-growth of NOPAT and Revenues, lower NOPAT and higher I.C. will cause the ratio to fall. For that matter, while analysing the above formula closely, we need to keep checking NOPAT growth in sync with adjusted formula.

On analysing the above table very closely, we see that right from 2011 to 2020 NOPAT/IC Margin are continuously rising. It is only from 2016 to 2018, the margins moved lower. As explained, lower margins is justified because of de-growth in NOPAT and Revenue i.e. the margins will be lower when NOPAT is de-grown. (De-growth reason might be cyclical & commodity business). Hence, we considering de-growth of NOPAT with lower margins of 2016 to 2018. From 2018 onwards, the growth has been back on track. This growth led to higher NOPAT/IC margins as compared to previous years.

So, to conclude. Company is consistently able to earn higher NOPAT over its I.C. Which means company is moving to Higher Margins VAP Category.

Thank You!!

 

Disclaimer: Views are personal and presented through independent research. By no means there is any stock advice. Also, presented content is for learning purpose only. I might be wrong in presenting data and inaccurate data, let me know if you find any discrepancies.