Be Wary Of China Aerospace Times Electronics (SHSE:600879) And Its Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at China Aerospace Times Electronics (SHSE:600879) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on China Aerospace Times Electronics is:

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

0.016 = CN¥390m ÷ (CN¥46b - CN¥21b) (Based on the trailing twelve months to September 2024).

Therefore, China Aerospace Times Electronics has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 4.4%.

Check out our latest analysis for China Aerospace Times Electronics

In the above chart we have measured China Aerospace Times Electronics' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for China Aerospace Times Electronics .

How Are Returns Trending?

We weren't thrilled with the trend because China Aerospace Times Electronics' ROCE has reduced by 73% over the last five years, while the business employed 88% more capital. Usually this isn't ideal, but given China Aerospace Times Electronics conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with China Aerospace Times Electronics' earnings and if they change as a result from the capital raise.

Another thing to note, China Aerospace Times Electronics has a high ratio of current liabilities to total assets of 46%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From China Aerospace Times Electronics' ROCE

We're a bit apprehensive about China Aerospace Times Electronics because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 53% return to shareholders over the last five 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.

China Aerospace Times Electronics does have some risks though, and we've spotted 1 warning sign for China Aerospace Times Electronics that you might be interested in.

While China Aerospace Times Electronics 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.