The Returns On Capital At Nine Dragons Paper (Holdings) (HKG:2689) Don't Inspire Confidence

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. However, after briefly looking over the numbers, we don't think Nine Dragons Paper (Holdings) (HKG:2689) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

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

Thus, 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 8.0%.

See 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, you can check out the forecasts from the analysts covering Nine Dragons Paper (Holdings) for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Nine Dragons Paper (Holdings) doesn't inspire confidence. To be more specific, ROCE has fallen from 14% over the last five years. 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'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.

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. Since the stock has declined 48% over the last five years, investors may not be too optimistic on this trend improving either. 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.

On a final note, we've found 1 warning sign for Nine Dragons Paper (Holdings) that we think you should be aware of.

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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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.