Returns On Capital At BOC Aviation (HKG:2588) Have Hit The Brakes

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at BOC Aviation (HKG:2588) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.063 = US$1.2b ÷ (US$23b - US$4.0b) (Based on the trailing twelve months to June 2023).

Thus, BOC Aviation has an ROCE of 6.3%. In absolute terms, that's a low return but it's around the Trade Distributors industry average of 5.5%.

View 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.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at BOC Aviation. The company has employed 25% more capital in the last five years, and the returns on that capital have remained stable at 6.3%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On BOC Aviation's ROCE

Long story short, while BOC Aviation has been reinvesting its capital, the returns that it's generating haven't increased. And with the stock having returned a mere 2.5% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know more about BOC Aviation, we've spotted 2 warning signs, and 1 of them is concerning.

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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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.