Stock Analysis

Lee & Man Paper Manufacturing's (HKG:2314) Returns On Capital Not Reflecting Well On The Business

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When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Lee & Man Paper Manufacturing (HKG:2314), we weren't too hopeful.

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. Analysts use this formula to calculate it for Lee & Man Paper Manufacturing:

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

0.018 = HK$677m ÷ (HK$50b - HK$12b) (Based on the trailing twelve months to December 2022).

So, Lee & Man Paper Manufacturing has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Forestry industry average of 9.1%.

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SEHK:2314 Return on Capital Employed March 29th 2023

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 report for Lee & Man Paper Manufacturing.

What Does the ROCE Trend For Lee & Man Paper Manufacturing Tell Us?

In terms of Lee & Man Paper Manufacturing's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 18%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Lee & Man Paper Manufacturing becoming one if things continue as they have.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 48% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Lee & Man Paper Manufacturing does have some risks though, and we've spotted 2 warning signs for Lee & Man Paper Manufacturing that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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