Return Trends At BOC Aviation (HKG:2588) Aren't Appealing

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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?

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)

0.06 = US$1.2b ÷ (US$23b - US$2.8b) (Based on the trailing twelve months to June 2022).

Thus, BOC Aviation has an ROCE of 6.0%. On its own that's a low return, but compared to the average of 4.1% generated by the Trade Distributors industry, it's much better.

See our latest analysis for BOC Aviation

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 to see what analysts are forecasting going forward, you should check out our free report for BOC Aviation.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at BOC Aviation. The company has consistently earned 6.0% for the last five years, and the capital employed within the business has risen 54% 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 Bottom Line

In summary, BOC Aviation has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 53% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing: We've identified 2 warning signs with BOC Aviation (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

While BOC Aviation may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.