Capital Allocation Trends At Nine Dragons Paper (Holdings) (HKG:2689) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Nine Dragons Paper (Holdings) (HKG:2689) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

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 Nine Dragons Paper (Holdings):

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

0.029 = CN¥3.1b ÷ (CN¥143b - CN¥36b) (Based on the trailing twelve months to December 2024).

Therefore, Nine Dragons Paper (Holdings) has an ROCE of 2.9%. On its own that's a low return, but compared to the average of 1.6% generated by the Forestry industry, it's much better.

View our latest analysis for Nine Dragons Paper (Holdings)

Above you can see how the current ROCE for Nine Dragons Paper (Holdings) 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 analyst report for Nine Dragons Paper (Holdings) .

How Are Returns Trending?

On the surface, the trend of ROCE at Nine Dragons Paper (Holdings) doesn't inspire confidence. To be more specific, ROCE has fallen from 9.6% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Nine Dragons Paper (Holdings) is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 54% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know about the risks facing Nine Dragons Paper (Holdings), we've discovered 1 warning sign that you should be aware of.

While Nine Dragons Paper (Holdings) 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.