AviChina Industry & Technology (HKG:2357) Could Become A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, the ROCE of AviChina Industry & Technology (HKG:2357) looks great, so lets see what the trend can tell us.

What is 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. Analysts use this formula to calculate it for AviChina Industry & Technology:

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

0.35 = CN¥4.2b ÷ (CN¥20b - CN¥8.3b) (Based on the trailing twelve months to March 2021).

Thus, AviChina Industry & Technology has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 7.4% earned by companies in a similar industry.

View our latest analysis for AviChina Industry & Technology

Above you can see how the current ROCE for AviChina Industry & Technology 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 report on analyst forecasts for the company.

What Does the ROCE Trend For AviChina Industry & Technology Tell Us?

You'd find it hard not to be impressed with the ROCE trend at AviChina Industry & Technology. We found that the returns on capital employed over the last five years have risen by 341%. The company is now earning CN¥0.4 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 64% less than it was five years ago, which can be indicative of a business that's improving its efficiency. AviChina Industry & Technology may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

One more thing to note, AviChina Industry & Technology has decreased current liabilities to 41% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that AviChina Industry & Technology has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Bottom Line

From what we've seen above, AviChina Industry & Technology has managed to increase it's returns on capital all the while reducing it's capital base. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know more about AviChina Industry & Technology, we've spotted 2 warning signs, and 1 of them is significant.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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