Be Wary Of Lee & Man Paper Manufacturing (HKG:2314) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Lee & Man Paper Manufacturing (HKG:2314), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Lee & Man Paper Manufacturing is:

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

0.077 = HK$3.1b ÷ (HK$52b - HK$12b) (Based on the trailing twelve months to December 2021).

Thus, Lee & Man Paper Manufacturing has an ROCE of 7.7%. Even though it's in line with the industry average of 7.6%, it's still a low return by itself.

View our latest analysis for Lee & Man Paper Manufacturing

Above you can see how the current ROCE for Lee & Man Paper Manufacturing compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Lee & Man Paper Manufacturing's ROCE Trend?

On the surface, the trend of ROCE at Lee & Man Paper Manufacturing doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 7.7%. 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.

Our Take On Lee & Man Paper Manufacturing's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Lee & Man Paper Manufacturing is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 54% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

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

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.