There Are Reasons To Feel Uneasy About Nine Dragons Paper (Holdings)'s (HKG:2689) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Nine Dragons Paper (Holdings) (HKG:2689), we don't think it's current trends fit the mold of a multi-bagger.

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)

0.026 = CN¥2.8b ÷ (CN¥138b - CN¥31b) (Based on the trailing twelve months to June 2024).

So, Nine Dragons Paper (Holdings) has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 7.3%.

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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Nine Dragons Paper (Holdings) .

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

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 2.6% from 10% 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.

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

In summary, Nine Dragons Paper (Holdings) is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 53% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

One more thing, we've spotted 1 warning sign facing Nine Dragons Paper (Holdings) that you might find interesting.

While Nine Dragons Paper (Holdings) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.