Hefei Jianghang Aircraft Equipment's (SHSE:688586) Returns On Capital Are Heading Higher

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Hefei Jianghang Aircraft Equipment (SHSE:688586) 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 Hefei Jianghang Aircraft Equipment is:

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

0.063 = CN¥174m ÷ (CN¥3.6b - CN¥839m) (Based on the trailing twelve months to December 2023).

Thus, Hefei Jianghang Aircraft Equipment has an ROCE of 6.3%. On its own, that's a low figure but it's around the 5.4% average generated by the Aerospace & Defense industry.

See our latest analysis for Hefei Jianghang Aircraft Equipment

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Hefei Jianghang Aircraft Equipment's past further, check out this free graph covering Hefei Jianghang Aircraft Equipment's past earnings, revenue and cash flow.

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.3%. The amount of capital employed has increased too, by 125%. So we're very much inspired by what we're seeing at Hefei Jianghang Aircraft Equipment thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 23%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line On Hefei Jianghang Aircraft Equipment's ROCE

To sum it up, Hefei Jianghang Aircraft Equipment has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 34% over the last three years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Hefei Jianghang Aircraft Equipment does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Hefei Jianghang Aircraft Equipment 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.