Nine Dragons Paper (Holdings) (HKG:2689) Might Be Having Difficulty Using Its Capital Effectively

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Although, when we looked at Nine Dragons Paper (Holdings) (HKG:2689), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.042 = CN¥3.7b ÷ (CN¥107b - CN¥18b) (Based on the trailing twelve months to June 2022).

So, Nine Dragons Paper (Holdings) has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 8.3%.

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 The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Nine Dragons Paper (Holdings), we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.2% from 14% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that Nine Dragons Paper (Holdings) is reinvesting in the business, but returns have been falling. Since the stock has declined 42% over the last five years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Nine Dragons Paper (Holdings) has the makings of a multi-bagger.

If you want to know some of the risks facing Nine Dragons Paper (Holdings) we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Nine Dragons Paper (Holdings) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.