There's Been No Shortage Of Growth Recently For Guizhou Aviation Technical Development's (SHSE:688239) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Guizhou Aviation Technical Development (SHSE:688239) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Guizhou Aviation Technical Development, this is the formula:

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

0.12 = CN¥263m ÷ (CN¥3.5b - CN¥1.4b) (Based on the trailing twelve months to September 2023).

Therefore, Guizhou Aviation Technical Development has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 5.4% generated by the Aerospace & Defense industry.

Check out our latest analysis for Guizhou Aviation Technical Development

Above you can see how the current ROCE for Guizhou Aviation Technical Development 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 Guizhou Aviation Technical Development for free.

So How Is Guizhou Aviation Technical Development's ROCE Trending?

Guizhou Aviation Technical Development has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 12% which is a sight for sore eyes. Not only that, but the company is utilizing 304% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In Conclusion...

To the delight of most shareholders, Guizhou Aviation Technical Development has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 57% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we've found 2 warning signs for Guizhou Aviation Technical Development that we think you should be aware of.

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.