The Returns At Nine Dragons Paper (Holdings) (HKG:2689) Aren't Growing

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Nine Dragons Paper (Holdings) (HKG:2689), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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. 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)

0.095 = CN¥6.6b ÷ (CN¥96b - CN¥27b) (Based on the trailing twelve months to December 2021).

Therefore, Nine Dragons Paper (Holdings) has an ROCE of 9.5%. On its own, that's a low figure but it's around the 8.3% average generated by the Forestry industry.

Check out 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'd like, you can check out the forecasts from the analysts covering Nine Dragons Paper (Holdings) here for free.

The Trend Of ROCE

The returns on capital haven't changed much for Nine Dragons Paper (Holdings) in recent years. The company has employed 43% more capital in the last five years, and the returns on that capital have remained stable at 9.5%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

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

In summary, Nine Dragons Paper (Holdings) has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 3.8% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know more about Nine Dragons Paper (Holdings), we've spotted 3 warning signs, and 1 of them is significant.

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.