If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Nine Dragons Paper (Holdings) (HKG:2689) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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 Nine Dragons Paper (Holdings):

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).

Thus, Nine Dragons Paper (Holdings) has an ROCE of 9.5%. On its own, that's a low figure but it's around the 8.5% average generated by the Forestry industry.

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

What The Trend Of ROCE Can Tell Us

In terms of Nine Dragons Paper (Holdings)'s historical ROCE trend, it doesn't exactly demand attention. 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.

The Bottom Line On Nine Dragons Paper (Holdings)'s ROCE

As we've seen above, Nine Dragons Paper (Holdings)'s returns on capital haven't increased but it is reinvesting in the business. Since the stock has declined 38% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing Nine Dragons Paper (Holdings) we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Nine Dragons Paper (Holdings) 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. 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.