We Like These Underlying Return On Capital Trends At Avic Aviation High-Technology (SHSE:600862)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in Avic Aviation High-Technology's (SHSE:600862) returns on capital, so let's have a look.

Understanding 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 Avic Aviation High-Technology, this is the formula:

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

0.16 = CN¥1.0b ÷ (CN¥8.7b - CN¥2.2b) (Based on the trailing twelve months to September 2023).

Therefore, Avic Aviation High-Technology has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 6.0% it's much better.

Check out our latest analysis for Avic Aviation High-Technology

In the above chart we have measured Avic Aviation High-Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Avic Aviation High-Technology for free.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Avic Aviation High-Technology. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 16%. 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 50%. So we're very much inspired by what we're seeing at Avic Aviation High-Technology thanks to its ability to profitably reinvest capital.

One more thing to note, Avic Aviation High-Technology has decreased current liabilities to 25% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Avic Aviation High-Technology's ROCE

All in all, it's terrific to see that Avic Aviation High-Technology is reaping the rewards from prior investments and is growing its capital base. And a remarkable 144% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Avic Aviation High-Technology can keep these trends up, it could have a bright future ahead.

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.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.