Stock Analysis

Be Wary Of Hefei Jianghang Aircraft EquipmentLtd (SHSE:688586) And Its Returns On Capital

SHSE:688586
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Hefei Jianghang Aircraft EquipmentLtd (SHSE:688586) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Hefei Jianghang Aircraft EquipmentLtd is:

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

0.041 = CN¥110m ÷ (CN¥3.5b - CN¥817m) (Based on the trailing twelve months to September 2024).

So, Hefei Jianghang Aircraft EquipmentLtd has an ROCE of 4.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.4%.

Check out our latest analysis for Hefei Jianghang Aircraft EquipmentLtd

roce
SHSE:688586 Return on Capital Employed December 18th 2024

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'd like to look at how Hefei Jianghang Aircraft EquipmentLtd has performed in the past in other metrics, you can view this free graph of Hefei Jianghang Aircraft EquipmentLtd's past earnings, revenue and cash flow.

What Does the ROCE Trend For Hefei Jianghang Aircraft EquipmentLtd Tell Us?

When we looked at the ROCE trend at Hefei Jianghang Aircraft EquipmentLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.1% from 7.5% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

In summary, Hefei Jianghang Aircraft EquipmentLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 35% in the last three years. Therefore based on the analysis done in this article, we don't think Hefei Jianghang Aircraft EquipmentLtd has the makings of a multi-bagger.

One more thing, we've spotted 2 warning signs facing Hefei Jianghang Aircraft EquipmentLtd that you might find interesting.

While Hefei Jianghang Aircraft EquipmentLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Valuation is complex, but we're here to simplify it.

Discover if Hefei Jianghang Aircraft EquipmentLtd might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.