Jiangsu Maixinlin Aviation Science and Technology (SHSE:688685) Is Reinvesting At Lower Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Having said that, from a first glance at Jiangsu Maixinlin Aviation Science and Technology (SHSE:688685) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 Jiangsu Maixinlin Aviation Science and Technology, this is the formula:

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

0.05 = CN¥46m ÷ (CN¥2.0b - CN¥1.1b) (Based on the trailing twelve months to September 2024).

So, Jiangsu Maixinlin Aviation Science and Technology has an ROCE of 5.0%. In absolute terms, that's a low return but it's around the Aerospace & Defense industry average of 4.4%.

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

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Jiangsu Maixinlin Aviation Science and Technology.

What The Trend Of ROCE Can Tell Us

In terms of Jiangsu Maixinlin Aviation Science and Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five 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.

On a side note, Jiangsu Maixinlin Aviation Science and Technology's current liabilities have increased over the last five years to 54% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. 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

In summary, despite lower returns in the short term, we're encouraged to see that Jiangsu Maixinlin Aviation Science and Technology is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 97% over the last three years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we've found 3 warning signs for Jiangsu Maixinlin Aviation Science and Technology that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.