Returns On Capital Signal Tricky Times Ahead For China Sunshine Paper Holdings (HKG:2002)
There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at China Sunshine Paper Holdings (HKG:2002), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on China Sunshine Paper Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = CN¥471m ÷ (CN¥12b - CN¥6.1b) (Based on the trailing twelve months to June 2022).
Therefore, China Sunshine Paper Holdings has an ROCE of 8.2%. In absolute terms, that's a low return but it's around the Packaging industry average of 9.6%.
View our latest analysis for China Sunshine Paper Holdings
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating China Sunshine Paper Holdings' past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of China Sunshine Paper Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 20% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, China Sunshine Paper Holdings has done well to pay down its current liabilities to 52% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.
What We Can Learn From China Sunshine Paper Holdings' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that China Sunshine Paper Holdings is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 16% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
On a final note, we found 2 warning signs for China Sunshine Paper Holdings (1 is a bit unpleasant) you should be aware of.
While China Sunshine Paper Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
China Sunshine Paper Holdings
China Sunshine Paper Holdings Company Limited, together with its subsidiaries, produces and sells paper products in the People's Republic of China and internationally.
Slightly overvalued with questionable track record.