Should We Be Excited About The Trends Of Returns At Longchen Paper & Packaging (TPE:1909)?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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 Longchen Paper & Packaging (TPE:1909) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. The formula for this calculation on Longchen Paper & Packaging is:

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

0.046 = NT$2.0b ÷ (NT$71b - NT$28b) (Based on the trailing twelve months to September 2020).

So, Longchen Paper & Packaging has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 6.5%.

View our latest analysis for Longchen Paper & Packaging

Historical performance is a great place to start when researching a stock so above you can see the gauge for Longchen Paper & Packaging's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Longchen Paper & Packaging, check out these free graphs here.

What Does the ROCE Trend For Longchen Paper & Packaging Tell Us?

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 4.6% from 6.5% 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.

In Conclusion...

In summary, we're somewhat concerned by Longchen Paper & Packaging's diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 154% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing to note, we've identified 2 warning signs with Longchen Paper & Packaging and understanding these 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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