Returns On Capital Signal Tricky Times Ahead For Lee & Man Paper Manufacturing (HKG:2314)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. In light of that, when we looked at Lee & Man Paper Manufacturing (HKG:2314) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 & Man Paper Manufacturing, this is the formula:

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

0.042 = HK$1.7b ÷ (HK$52b - HK$13b) (Based on the trailing twelve months to June 2022).

So, Lee & Man Paper Manufacturing has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Forestry industry average of 8.0%.

See 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 report for Lee & Man Paper Manufacturing.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Lee & Man Paper Manufacturing, we didn't gain much confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 4.2%. However it looks like Lee & Man Paper Manufacturing might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Lee & Man Paper Manufacturing's ROCE

Bringing it all together, while we're somewhat encouraged by Lee & Man Paper Manufacturing's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 49% in the last five years. Therefore based on the analysis done in this article, we don't think Lee & Man Paper Manufacturing has the makings of a multi-bagger.

One more thing to note, we've identified 3 warning signs with Lee & Man Paper Manufacturing and understanding these should be part of your investment process.

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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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.