China Aerospace Times Electronics (SHSE:600879) Will Want To Turn Around Its Return Trends

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think China Aerospace Times Electronics (SHSE:600879) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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¥396m ÷ (CN¥49b - CN¥25b) (Based on the trailing twelve months to June 2024).

Thus, 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 4.1%.

See 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?

Unfortunately, the trend isn't great with ROCE falling from 6.1% five years ago, while capital employed has grown 90%. That being said, China Aerospace Times Electronics raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. 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 50%. 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.

The Key Takeaway

In summary, China Aerospace Times Electronics is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 40% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Like most companies, China Aerospace Times Electronics does come with some risks, and we've found 3 warning signs that you should be aware of.

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.

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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.