Capital Allocation Trends At Hunan Aerospace Huanyu Communication TechnologyLTD (SHSE:688523) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Hunan Aerospace Huanyu Communication TechnologyLTD (SHSE:688523), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Hunan Aerospace Huanyu Communication TechnologyLTD, this is the formula:

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

0.051 = CN¥102m ÷ (CN¥2.2b - CN¥248m) (Based on the trailing twelve months to March 2024).

Therefore, Hunan Aerospace Huanyu Communication TechnologyLTD has an ROCE of 5.1%. On its own, that's a low figure but it's around the 4.3% average generated by the Aerospace & Defense industry.

Check out our latest analysis for Hunan Aerospace Huanyu Communication TechnologyLTD

Above you can see how the current ROCE for Hunan Aerospace Huanyu Communication TechnologyLTD compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hunan Aerospace Huanyu Communication TechnologyLTD .

How Are Returns Trending?

On the surface, the trend of ROCE at Hunan Aerospace Huanyu Communication TechnologyLTD doesn't inspire confidence. To be more specific, ROCE has fallen from 14% over the last four years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Hunan Aerospace Huanyu Communication TechnologyLTD is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 32% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Hunan Aerospace Huanyu Communication TechnologyLTD does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

While Hunan Aerospace Huanyu Communication TechnologyLTD isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.