Minfeng Special PaperLtd's (SHSE:600235) Returns On Capital Are Heading Higher

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Minfeng Special PaperLtd (SHSE:600235) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Minfeng Special PaperLtd, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.049 = CN¥84m ÷ (CN¥2.6b - CN¥855m) (Based on the trailing twelve months to March 2024).

Thus, Minfeng Special PaperLtd has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 6.3%.

Check out our latest analysis for Minfeng Special PaperLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Minfeng Special PaperLtd's ROCE against it's prior returns. If you'd like to look at how Minfeng Special PaperLtd has performed in the past in other metrics, you can view this free graph of Minfeng Special PaperLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Minfeng Special PaperLtd Tell Us?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 4.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 32% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Key Takeaway

All in all, it's terrific to see that Minfeng Special PaperLtd is reaping the rewards from prior investments and is growing its capital base. Given the stock has declined 23% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing to note, we've identified 2 warning signs with Minfeng Special PaperLtd and understanding them should be part of your investment process.

While Minfeng Special PaperLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.