Lee & Man Paper Manufacturing (HKG:2314) Will Want To Turn Around Its Return Trends

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating Lee & Man Paper Manufacturing (HKG:2314), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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)

0.018 = HK$769m ÷ (HK$54b - HK$11b) (Based on the trailing twelve months to December 2023).

So, Lee & Man Paper Manufacturing has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 7.5%.

Check out 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Lee & Man Paper Manufacturing .

How Are Returns Trending?

When we looked at the ROCE trend at Lee & Man Paper Manufacturing, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.8% from 16% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

In summary, we're somewhat concerned by Lee & Man Paper Manufacturing's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 38% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 2 warning signs with Lee & Man Paper Manufacturing (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

While Lee & Man Paper Manufacturing isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.