Here's What To Make Of Aecc Aero-Engine ControlLtd's (SZSE:000738) Decelerating 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? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Aecc Aero-Engine ControlLtd (SZSE:000738), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Aecc Aero-Engine ControlLtd, this is the formula:

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

0.057 = CN¥745m ÷ (CN¥16b - CN¥3.2b) (Based on the trailing twelve months to September 2024).

Thus, Aecc Aero-Engine ControlLtd has an ROCE of 5.7%. In absolute terms, that's a low return, but it's much better than the Aerospace & Defense industry average of 4.4%.

See our latest analysis for Aecc Aero-Engine ControlLtd

Above you can see how the current ROCE for Aecc Aero-Engine ControlLtd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Aecc Aero-Engine ControlLtd .

What The Trend Of ROCE Can Tell Us

In terms of Aecc Aero-Engine ControlLtd's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 5.7% for the last five years, and the capital employed within the business has risen 114% in that time. 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.

The Bottom Line On Aecc Aero-Engine ControlLtd's ROCE

As we've seen above, Aecc Aero-Engine ControlLtd's returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 43% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching Aecc Aero-Engine ControlLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Aecc Aero-Engine ControlLtd 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.