AviChina Industry & Technology (HKG:2357) Will Want To Turn Around Its Return Trends

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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.

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. The formula for this calculation on AviChina Industry & Technology is:

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

0.054 = CN¥5.1b ÷ (CN¥178b - CN¥84b) (Based on the trailing twelve months to June 2023).

Therefore, AviChina Industry & Technology has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 7.4%.

Check out 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'd like, you can check out the forecasts from the analysts covering AviChina Industry & Technology here for free.

So How Is AviChina Industry & Technology's ROCE Trending?

We weren't thrilled with the trend because AviChina Industry & Technology's ROCE has reduced by 21% over the last five years, while the business employed 136% more capital. That being said, AviChina Industry & Technology raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. AviChina Industry & Technology probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. Additionally, we found that AviChina Industry & Technology's most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.

On a side note, AviChina Industry & Technology's current liabilities are still rather high at 47% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On 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 growth trends haven't led to growth returns though, since the stock has fallen 15% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know about the risks facing AviChina Industry & Technology, we've discovered 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.