Returns On Capital At Lee and Man Paper Manufacturing (HKG:2314) Have Hit The Brakes

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Lee and Man Paper Manufacturing's (HKG:2314) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Lee and Man Paper Manufacturing, this is the formula:

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

0.10 = HK$3.9b ÷ (HK$47b - HK$8.6b) (Based on the trailing twelve months to December 2020).

Therefore, Lee and Man Paper Manufacturing has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 7.5% generated by the Forestry industry.

View our latest analysis for Lee and Man Paper Manufacturing

In the above chart we have measured Lee and Man Paper Manufacturing's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Lee and Man Paper Manufacturing.

So How Is Lee and Man Paper Manufacturing's ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 10% for the last five years, and the capital employed within the business has risen 41% in that time. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line On Lee and Man Paper Manufacturing's ROCE

To sum it up, Lee and Man Paper Manufacturing has simply been reinvesting capital steadily, at those decent rates of return. And the stock has followed suit returning a meaningful 85% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you want to continue researching Lee and Man Paper Manufacturing, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Lee and Man Paper Manufacturing 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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