Hunan Aerospace Huanyu Communication TechnologyLTD (SHSE:688523) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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.

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. Analysts use this formula to calculate it for Hunan Aerospace Huanyu Communication TechnologyLTD:

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

0.055 = CN¥104m ÷ (CN¥2.2b - CN¥295m) (Based on the trailing twelve months to June 2024).

Thus, Hunan Aerospace Huanyu Communication TechnologyLTD has an ROCE of 5.5%. In absolute terms, that's a low return, but it's much better than the Aerospace & Defense industry average of 4.1%.

View 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 .

So How Is Hunan Aerospace Huanyu Communication TechnologyLTD's ROCE Trending?

When we looked at the ROCE trend at Hunan Aerospace Huanyu Communication TechnologyLTD, we didn't gain much confidence. Around four years ago the returns on capital were 15%, but since then they've fallen to 5.5%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

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. These growth trends haven't led to growth returns though, since the stock has fallen 29% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 3 warning signs we've spotted with Hunan Aerospace Huanyu Communication TechnologyLTD (including 1 which makes us a bit uncomfortable) .

While Hunan Aerospace Huanyu Communication TechnologyLTD may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.