AviChina Industry & Technology (HKG:2357) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at AviChina Industry & Technology (HKG:2357) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.045 = CN¥4.7b ÷ (CN¥200b - CN¥94b) (Based on the trailing twelve months to June 2025).

Thus, AviChina Industry & Technology has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 7.4%.

View our latest analysis for AviChina Industry & Technology

In the above chart we have measured AviChina Industry & Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for AviChina Industry & Technology .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at AviChina Industry & Technology, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.5% from 6.5% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a separate but related note, it's important to know that AviChina Industry & Technology has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From AviChina Industry & Technology's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for AviChina Industry & Technology. These trends are starting to be recognized by investors since the stock has delivered a 16% 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.

If you're still interested in AviChina Industry & Technology it's worth checking out our FREE intrinsic value approximation for 2357 to see if it's trading at an attractive price in other respects.

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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.