Investors Met With Slowing Returns on Capital At BOC Aviation (HKG:2588)

By
Simply Wall St
Published
May 23, 2021
SEHK:2588

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at BOC Aviation (HKG:2588), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on BOC Aviation is:

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

0.058 = US$1.2b ÷ (US$24b - US$2.2b) (Based on the trailing twelve months to December 2020).

Thus, BOC Aviation has an ROCE of 5.8%. On its own that's a low return, but compared to the average of 3.7% generated by the Trade Distributors industry, it's much better.

See our latest analysis for BOC Aviation

roce
SEHK:2588 Return on Capital Employed May 24th 2021

Above you can see how the current ROCE for BOC Aviation 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 BOC Aviation here for free.

What Can We Tell From BOC Aviation's ROCE Trend?

The returns on capital haven't changed much for BOC Aviation in recent years. The company has consistently earned 5.8% for the last five years, and the capital employed within the business has risen 90% in that time. 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.

The Key Takeaway

As we've seen above, BOC Aviation's returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 63% over the last three years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

BOC Aviation does have some risks, we noticed 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

While BOC Aviation isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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