Investors Will Want Nine Dragons Paper (Holdings)'s (HKG:2689) Growth In ROCE To Persist

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Speaking of which, we noticed some great changes in Nine Dragons Paper (Holdings)'s (HKG:2689) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Nine Dragons Paper (Holdings) is:

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

0.12 = CN¥7.7b ÷ (CN¥83b - CN¥21b) (Based on the trailing twelve months to December 2020).

Therefore, Nine Dragons Paper (Holdings) has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Forestry industry average of 7.4% 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 report on analyst forecasts for the company.

What Can We Tell From Nine Dragons Paper (Holdings)'s ROCE Trend?

Nine Dragons Paper (Holdings) is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 32% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Our Take On Nine Dragons Paper (Holdings)'s ROCE

All in all, it's terrific to see that Nine Dragons Paper (Holdings) is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Nine Dragons Paper (Holdings) can keep these trends up, it could have a bright future ahead.

Nine Dragons Paper (Holdings) does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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