We Like These Underlying Return On Capital Trends At AVIC (Chengdu)UAS (SHSE:688297)

What trends should we look for it we want to identify stocks that can 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at AVIC (Chengdu)UAS (SHSE:688297) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for AVIC (Chengdu)UAS:

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

0.012 = CN¥73m ÷ (CN¥7.2b - CN¥1.3b) (Based on the trailing twelve months to March 2024).

Therefore, AVIC (Chengdu)UAS has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 4.3%.

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 .

The Trend Of ROCE

We're delighted to see that AVIC (Chengdu)UAS is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 1.2% which is a sight for sore eyes. In addition to that, AVIC (Chengdu)UAS is employing 1,975% more capital than previously which is expected of a company that's 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.

The Bottom Line

Long story short, we're delighted to see that AVIC (Chengdu)UAS' reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 34% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.

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.