If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at AVIC (Chengdu)UAS (SHSE:688297) and its trend of ROCE, we really liked what we saw.

Understanding 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 AVIC (Chengdu)UAS:

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

0.012 = CN¥73m ÷ (CN¥7.2b - CN¥1.3b) (Based on the trailing twelve months to March 2024).

So, AVIC (Chengdu)UAS has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 4.3%.

Above you can see how the current ROCE for AVIC (Chengdu)UAS compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for AVIC (Chengdu)UAS .

What Does the ROCE Trend For AVIC (Chengdu)UAS Tell Us?

AVIC (Chengdu)UAS has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.2% on its capital. Not only that, but the company is utilizing 1,975% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Bottom Line On AVIC (Chengdu)UAS' ROCE

To the delight of most shareholders, AVIC (Chengdu)UAS has now broken into profitability. And since the stock has fallen 27% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Like most companies, AVIC (Chengdu)UAS does come with some risks, and we've found 1 warning sign that 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com