Investors Could Be Concerned With Nine Dragons Paper (Holdings)'s (HKG:2689) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Nine Dragons Paper (Holdings) (HKG:2689) and its ROCE trend, we weren't exactly thrilled.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Nine Dragons Paper (Holdings), this is the formula:

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

0.0037 = CN¥366m ÷ (CN¥129b - CN¥30b) (Based on the trailing twelve months to December 2023).

Therefore, Nine Dragons Paper (Holdings) has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Forestry industry average of 7.7%.

Check out 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Nine Dragons Paper (Holdings) .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Nine Dragons Paper (Holdings) doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 0.4%. However it looks like Nine Dragons Paper (Holdings) 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 Nine Dragons Paper (Holdings)'s ROCE

Bringing it all together, while we're somewhat encouraged by Nine Dragons Paper (Holdings)'s reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 43% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Nine Dragons Paper (Holdings) does have some risks though, and we've spotted 1 warning sign for Nine Dragons Paper (Holdings) 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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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.

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