Here's What's Concerning About Beijing Emerging Eastern Aviation Equipment's (SZSE:002933) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after investigating Beijing Emerging Eastern Aviation Equipment (SZSE:002933), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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 Beijing Emerging Eastern Aviation Equipment, this is the formula:

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

0.0005 = CN¥985k ÷ (CN¥2.4b - CN¥473m) (Based on the trailing twelve months to March 2024).

So, Beijing Emerging Eastern Aviation Equipment has an ROCE of 0.05%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 4.3%.

Check out our latest analysis for Beijing Emerging Eastern Aviation Equipment

Historical performance is a great place to start when researching a stock so above you can see the gauge for Beijing Emerging Eastern Aviation Equipment's ROCE against it's prior returns. If you're interested in investigating Beijing Emerging Eastern Aviation Equipment's past further, check out this free graph covering Beijing Emerging Eastern Aviation Equipment's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Beijing Emerging Eastern Aviation Equipment, we didn't gain much confidence. Around five years ago the returns on capital were 10%, but since then they've fallen to 0.05%. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 19%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 0.05%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line On Beijing Emerging Eastern Aviation Equipment's ROCE

While returns have fallen for Beijing Emerging Eastern Aviation Equipment in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 48% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Beijing Emerging Eastern Aviation Equipment does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

While Beijing Emerging Eastern Aviation Equipment isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

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