What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Jiangsu Maixinlin Aviation Science and Technology (SHSE:688685) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Jiangsu Maixinlin Aviation Science and Technology, this is the formula:

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

0.018 = CN¥15m ÷ (CN¥1.4b - CN¥566m) (Based on the trailing twelve months to March 2024).

Thus, Jiangsu Maixinlin Aviation Science and Technology has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 4.3%.

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Jiangsu Maixinlin Aviation Science and Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 10.0% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Jiangsu Maixinlin Aviation Science and Technology's current liabilities have increased over the last five years to 42% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.8%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line On Jiangsu Maixinlin Aviation Science and Technology's ROCE

In summary, we're somewhat concerned by Jiangsu Maixinlin Aviation Science and Technology's diminishing returns on increasing amounts of capital. However the stock has delivered a 24% return to shareholders over the last three years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about Jiangsu Maixinlin Aviation Science and Technology, we've spotted 5 warning signs, and 4 of them make us uncomfortable.

While Jiangsu Maixinlin Aviation Science and Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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