AVIC (Chengdu)UAS (SHSE:688297) Is Experiencing Growth In 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at AVIC (Chengdu)UAS (SHSE:688297) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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 AVIC (Chengdu)UAS is:

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

0.056 = CN¥328m ÷ (CN¥7.5b - CN¥1.7b) (Based on the trailing twelve months to December 2023).

So, AVIC (Chengdu)UAS has an ROCE of 5.6%. In absolute terms, that's a low return but it's around the Aerospace & Defense industry average of 5.2%.

See our latest analysis for AVIC (Chengdu)UAS

In the above chart we have measured AVIC (Chengdu)UAS' 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 AVIC (Chengdu)UAS .

What Can We Tell From AVIC (Chengdu)UAS' ROCE Trend?

We're delighted to see that AVIC (Chengdu)UAS is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 5.6% on its capital. And unsurprisingly, like most companies trying to break into the black, AVIC (Chengdu)UAS is utilizing 1,524% more capital than it was four years ago. 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.

Our Take On AVIC (Chengdu)UAS' ROCE

Long story short, we're delighted to see that AVIC (Chengdu)UAS' reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 27% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we've found 1 warning sign for AVIC (Chengdu)UAS 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.