Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after briefly looking over the numbers, we don't think Hefei Jianghang Aircraft EquipmentLtd (SHSE:688586) 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 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 Hefei Jianghang Aircraft EquipmentLtd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = CN¥129m ÷ (CN¥3.5b - CN¥786m) (Based on the trailing twelve months to June 2024).
Therefore, Hefei Jianghang Aircraft EquipmentLtd has an ROCE of 4.8%. In absolute terms, that's a low return but it's around the Aerospace & Defense industry average of 4.1%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hefei Jianghang Aircraft EquipmentLtd's ROCE against it's prior returns. If you're interested in investigating Hefei Jianghang Aircraft EquipmentLtd's past further, check out this free graph covering Hefei Jianghang Aircraft EquipmentLtd's past earnings, revenue and cash flow.
The Trend Of ROCE
When we looked at the ROCE trend at Hefei Jianghang Aircraft EquipmentLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 6.6% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From Hefei Jianghang Aircraft EquipmentLtd's ROCE
In summary, Hefei Jianghang Aircraft EquipmentLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 39% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
Hefei Jianghang Aircraft EquipmentLtd does have some risks though, and we've spotted 2 warning signs for Hefei Jianghang Aircraft EquipmentLtd that you might be interested in.
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.
