Returns On Capital At Aecc Aero-Engine ControlLtd (SZSE:000738) Have Hit The Brakes

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. In light of that, when we looked at Aecc Aero-Engine ControlLtd (SZSE:000738) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Aecc Aero-Engine ControlLtd is:

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

0.055 = CN¥721m ÷ (CN¥16b - CN¥2.9b) (Based on the trailing twelve months to March 2024).

Thus, Aecc Aero-Engine ControlLtd has an ROCE of 5.5%. 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.

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 Can We Tell From Aecc Aero-Engine ControlLtd's ROCE Trend?

In terms of Aecc Aero-Engine ControlLtd's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 5.5% and the business has deployed 119% more capital into its operations. 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.

What We Can Learn From Aecc Aero-Engine ControlLtd's ROCE

In summary, Aecc Aero-Engine ControlLtd has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 42% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Aecc Aero-Engine ControlLtd does have some risks though, and we've spotted 1 warning sign for Aecc Aero-Engine ControlLtd that you might be interested in.

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.