Returns On Capital At Hunan Aerospace Huanyu Communication TechnologyLTD (SHSE:688523) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Hunan Aerospace Huanyu Communication TechnologyLTD (SHSE:688523) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.054 = CN¥102m ÷ (CN¥2.2b - CN¥329m) (Based on the trailing twelve months to September 2024).

Thus, Hunan Aerospace Huanyu Communication TechnologyLTD has an ROCE of 5.4%. On its own that's a low return, but compared to the average of 4.4% generated by the Aerospace & Defense industry, it's much better.

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, you can check out the forecasts from the analysts covering Hunan Aerospace Huanyu Communication TechnologyLTD for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Hunan Aerospace Huanyu Communication TechnologyLTD, we didn't gain much confidence. To be more specific, ROCE has fallen from 16% 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.

The Bottom Line On Hunan Aerospace Huanyu Communication TechnologyLTD's ROCE

While returns have fallen for Hunan Aerospace Huanyu Communication TechnologyLTD in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 16% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing: We've identified 2 warning signs with Hunan Aerospace Huanyu Communication TechnologyLTD (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

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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.