There's Been No Shortage Of Growth Recently For AVIC Shenyang Aircraft's (SHSE:600760) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. 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 on that note, AVIC Shenyang Aircraft (SHSE:600760) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for AVIC Shenyang Aircraft:

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

0.16 = CN¥3.1b ÷ (CN¥48b - CN¥28b) (Based on the trailing twelve months to June 2024).

Thus, AVIC Shenyang Aircraft has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 4.1% generated by the Aerospace & Defense industry.

View our latest analysis for AVIC Shenyang Aircraft

Above you can see how the current ROCE for AVIC Shenyang Aircraft compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering AVIC Shenyang Aircraft for free.

What Does the ROCE Trend For AVIC Shenyang Aircraft Tell Us?

The trends we've noticed at AVIC Shenyang Aircraft are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 16%. The amount of capital employed has increased too, by 104%. So we're very much inspired by what we're seeing at AVIC Shenyang Aircraft thanks to its ability to profitably reinvest capital.

On a side note, AVIC Shenyang Aircraft's current liabilities are still rather high at 59% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what AVIC Shenyang Aircraft has. Since the stock has returned a staggering 217% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if AVIC Shenyang Aircraft can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 2 warning signs we've spotted with AVIC Shenyang Aircraft (including 1 which can't be ignored) .

While AVIC Shenyang Aircraft 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.