There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 briefly looking over the numbers, we don't think Hunan Aerospace Huanyu Communication TechnologyLTD (SHSE:688523) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
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 Hunan Aerospace Huanyu Communication TechnologyLTD is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = CN¥102m ÷ (CN¥2.2b - CN¥248m) (Based on the trailing twelve months to March 2024).
So, Hunan Aerospace Huanyu Communication TechnologyLTD has an ROCE of 5.1%. In absolute terms, that's a low return but it's around the Aerospace & Defense industry average of 4.3%.
Above you can see how the current ROCE for Hunan Aerospace Huanyu Communication TechnologyLTD 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 Hunan Aerospace Huanyu Communication TechnologyLTD .
So How Is Hunan Aerospace Huanyu Communication TechnologyLTD's ROCE Trending?
On the surface, the trend of ROCE at Hunan Aerospace Huanyu Communication TechnologyLTD doesn't inspire confidence. Over the last four years, returns on capital have decreased to 5.1% from 14% four years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line On Hunan Aerospace Huanyu Communication TechnologyLTD's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Hunan Aerospace Huanyu Communication TechnologyLTD is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 33% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
One final note, you should learn about the 3 warning signs we've spotted with Hunan Aerospace Huanyu Communication TechnologyLTD (including 1 which is potentially serious) .
While Hunan Aerospace Huanyu Communication TechnologyLTD 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.