Returns On Capital - An Important Metric For Nine Dragons Paper (Holdings) (HKG:2689)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Nine Dragons Paper (Holdings) (HKG:2689) and its trend of ROCE, we really liked what we saw.

What is 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 Nine Dragons Paper (Holdings), this is the formula:

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

0.099 = CN¥6.2b ÷ (CN¥79b - CN¥16b) (Based on the trailing twelve months to June 2020).

Therefore, Nine Dragons Paper (Holdings) has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Forestry industry average of 6.5%.

View our latest analysis for Nine Dragons Paper (Holdings)

In the above chart we have measured Nine Dragons Paper (Holdings)'s prior ROCE against its prior performance, but the future is arguably more important. 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?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.9%. The amount of capital employed has increased too, by 33%. So we're very much inspired by what we're seeing at Nine Dragons Paper (Holdings) thanks to its ability to profitably reinvest capital.

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

To sum it up, Nine Dragons Paper (Holdings) has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 159% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 3 warning signs with Nine Dragons Paper (Holdings) and understanding them 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. 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.
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