Hubei Chaozhuo Aviation Technology (SHSE:688237) Will Be Hoping To Turn Its Returns On Capital Around

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Hubei Chaozhuo Aviation Technology (SHSE:688237) and its ROCE trend, we weren't exactly thrilled.

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 Hubei Chaozhuo Aviation Technology is:

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

0.0017 = CN¥2.3m ÷ (CN¥1.6b - CN¥244m) (Based on the trailing twelve months to September 2024).

Therefore, Hubei Chaozhuo Aviation Technology has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 4.4%.

Check out our latest analysis for Hubei Chaozhuo Aviation Technology

Above you can see how the current ROCE for Hubei Chaozhuo Aviation Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Hubei Chaozhuo Aviation Technology .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Hubei Chaozhuo Aviation Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.2% from 8.1% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Hubei Chaozhuo Aviation Technology has done well to pay down its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Hubei Chaozhuo Aviation Technology's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Hubei Chaozhuo Aviation Technology is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 9.1% over the last year, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

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

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.