BOC Aviation (HKG:2588) Has Some Way To Go To Become A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at BOC Aviation (HKG:2588) and its ROCE trend, we weren't exactly thrilled.

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

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

0.057 = US$1.2b ÷ (US$24b - US$2.2b) (Based on the trailing twelve months to December 2021).

Therefore, BOC Aviation has an ROCE of 5.7%. On its own that's a low return, but compared to the average of 4.3% generated by the Trade Distributors industry, it's much better.

Check out our latest analysis for BOC Aviation

In the above chart we have measured BOC Aviation's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering BOC Aviation here for free.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at BOC Aviation. Over the past five years, ROCE has remained relatively flat at around 5.7% and the business has deployed 77% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

What We Can Learn From BOC Aviation's ROCE

Long story short, while BOC Aviation has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 98% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 2 warning signs with BOC Aviation (at least 1 which can't be ignored) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.