The Returns On Capital At Jiangsu Maixinlin Aviation Science and Technology (SHSE:688685) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Jiangsu Maixinlin Aviation Science and Technology (SHSE:688685), it didn't seem to tick all of these boxes.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.024 = CN¥17m ÷ (CN¥846m - CN¥134m) (Based on the trailing twelve months to December 2023).

Therefore, Jiangsu Maixinlin Aviation Science and Technology has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 5.4%.

See 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'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 Does the ROCE Trend For Jiangsu Maixinlin Aviation Science and Technology Tell Us?

When we looked at the ROCE trend at Jiangsu Maixinlin Aviation Science and Technology, we didn't gain much confidence. To be more specific, ROCE has fallen from 13% over the last four years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Jiangsu Maixinlin Aviation Science and Technology has done well to pay down its current liabilities to 16% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

To conclude, we've found that Jiangsu Maixinlin Aviation Science and Technology is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 141% gain to shareholders who have held over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to know some of the risks facing Jiangsu Maixinlin Aviation Science and Technology we've found 4 warning signs (3 shouldn't be ignored!) that you should be aware of before investing here.

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.