The Returns At Hefei Jianghang Aircraft EquipmentLtd (SHSE:688586) Aren't Growing

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Hefei Jianghang Aircraft EquipmentLtd (SHSE:688586), it didn't seem to tick all of these boxes.

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. To calculate this metric for Hefei Jianghang Aircraft EquipmentLtd, this is the formula:

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

0.065 = CN¥182m ÷ (CN¥3.6b - CN¥773m) (Based on the trailing twelve months to March 2024).

So, Hefei Jianghang Aircraft EquipmentLtd has an ROCE of 6.5%. 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.

Check out our latest analysis for Hefei Jianghang Aircraft EquipmentLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hefei Jianghang Aircraft EquipmentLtd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hefei Jianghang Aircraft EquipmentLtd.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Hefei Jianghang Aircraft EquipmentLtd. The company has employed 126% more capital in the last five years, and the returns on that capital have remained stable at 6.5%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 22% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

In conclusion, Hefei Jianghang Aircraft EquipmentLtd has been investing more capital into the business, but returns on that capital haven't increased. And in the last three years, the stock has given away 47% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Hefei Jianghang Aircraft EquipmentLtd does have some risks though, and we've spotted 1 warning sign for Hefei Jianghang Aircraft EquipmentLtd that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.