Investors Could Be Concerned With Jiangsu Maixinlin Aviation Science and Technology's (SHSE:688685) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 briefly looking over the numbers, we don't think Jiangsu Maixinlin Aviation Science and Technology (SHSE:688685) 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?

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. The formula for this calculation on Jiangsu Maixinlin Aviation Science and Technology is:

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

0.018 = CN¥15m ÷ (CN¥1.4b - CN¥566m) (Based on the trailing twelve months to March 2024).

So, Jiangsu Maixinlin Aviation Science and Technology has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 4.3%.

Check out our latest analysis for Jiangsu Maixinlin Aviation Science and Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Jiangsu Maixinlin Aviation Science and Technology's ROCE against it's prior returns. If you're interested in investigating Jiangsu Maixinlin Aviation Science and Technology's past further, check out this free graph covering Jiangsu Maixinlin Aviation Science and Technology's past earnings, revenue and cash flow.

What Can We Tell From Jiangsu Maixinlin Aviation Science and Technology's ROCE Trend?

When we looked at the ROCE trend at Jiangsu Maixinlin Aviation Science and Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.8% from 10.0% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 42%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.8%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On Jiangsu Maixinlin Aviation Science and Technology's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Jiangsu Maixinlin Aviation Science and Technology have fallen, meanwhile the business is employing more capital than it was five years ago. But investors must be expecting an improvement of sorts because over the last three yearsthe stock has delivered a respectable 23% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Jiangsu Maixinlin Aviation Science and Technology (of which 4 shouldn't be ignored!) that you should know about.

While Jiangsu Maixinlin Aviation Science and Technology 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com