Longchen Paper & Packaging (TPE:1909) Is Reinvesting At Lower Rates Of Return

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Longchen Paper & Packaging (TPE:1909), we don't think it's current trends fit the mold of a multi-bagger.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Longchen Paper & Packaging:

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

0.048 = NT$2.3b ÷ (NT$74b - NT$26b) (Based on the trailing twelve months to December 2020).

So, Longchen Paper & Packaging has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 7.5%.

See our latest analysis for Longchen Paper & Packaging

Above you can see how the current ROCE for Longchen Paper & Packaging 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.

The Trend Of ROCE

In terms of Longchen Paper & Packaging's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.8% from 6.9% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Longchen Paper & Packaging's ROCE

We're a bit apprehensive about Longchen Paper & Packaging because despite more capital being deployed in the business, returns on that capital and sales have both fallen. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 164%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Longchen Paper & Packaging does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those don't sit too well with us...

While Longchen Paper & Packaging 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. 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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