There's Been No Shortage Of Growth Recently For Avic Aviation High-Technology's (SHSE:600862) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, we've noticed some promising trends at Avic Aviation High-Technology (SHSE:600862) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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 Aviation High-Technology:

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

0.17 = CN¥1.2b ÷ (CN¥9.5b - CN¥2.4b) (Based on the trailing twelve months to March 2024).

So, Avic Aviation High-Technology has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 5.6% it's much better.

View our latest analysis for Avic Aviation High-Technology

Above you can see how the current ROCE for Avic Aviation High-Technology 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 Aviation High-Technology for free.

What Can We Tell From Avic Aviation High-Technology's ROCE Trend?

Investors would be pleased with what's happening at Avic Aviation High-Technology. The data shows that returns on capital have increased substantially over the last five years to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 57%. So we're very much inspired by what we're seeing at Avic Aviation High-Technology thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 26%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Avic Aviation High-Technology's ROCE

In summary, it's great to see that Avic Aviation High-Technology can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 126% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Avic Aviation High-Technology does have some risks though, and we've spotted 1 warning sign for Avic Aviation High-Technology that you might be interested in.

While Avic Aviation High-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.