Returns On Capital At Guanglian Aviation Industry (SZSE:300900) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Guanglian Aviation Industry (SZSE:300900) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Guanglian Aviation Industry, this is the formula:

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

0.054 = CN¥181m ÷ (CN¥4.2b - CN¥883m) (Based on the trailing twelve months to September 2023).

Thus, Guanglian Aviation Industry has an ROCE of 5.4%. Even though it's in line with the industry average of 5.4%, it's still a low return by itself.

Check out our latest analysis for Guanglian Aviation Industry

Above you can see how the current ROCE for Guanglian Aviation Industry 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 Guanglian Aviation Industry .

What Does the ROCE Trend For Guanglian Aviation Industry Tell Us?

On the surface, the trend of ROCE at Guanglian Aviation Industry doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 5.4%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Guanglian Aviation Industry's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Guanglian Aviation Industry is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 31% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Guanglian Aviation Industry does have some risks, we noticed 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

While Guanglian Aviation Industry 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.