Returns On Capital Signal Tricky Times Ahead For Weihai Guangtai Airport EquipmentLtd (SZSE:002111)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Weihai Guangtai Airport EquipmentLtd (SZSE:002111), 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. Analysts use this formula to calculate it for Weihai Guangtai Airport EquipmentLtd:

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

0.048 = CN¥201m ÷ (CN¥6.4b - CN¥2.2b) (Based on the trailing twelve months to September 2024).

Thus, Weihai Guangtai Airport EquipmentLtd has an ROCE of 4.8%. Even though it's in line with the industry average of 5.2%, it's still a low return by itself.

See our latest analysis for Weihai Guangtai Airport EquipmentLtd

In the above chart we have measured Weihai Guangtai Airport EquipmentLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Weihai Guangtai Airport EquipmentLtd for free.

How Are Returns Trending?

In terms of Weihai Guangtai Airport EquipmentLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Weihai Guangtai Airport EquipmentLtd. These trends are starting to be recognized by investors since the stock has delivered a 8.0% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing, we've spotted 2 warning signs facing Weihai Guangtai Airport EquipmentLtd that you might find interesting.

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.