Capital Allocation Trends At China Aerospace International Holdings (HKG:31) Aren't Ideal

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within China Aerospace International Holdings (HKG:31), we weren't too hopeful.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for China Aerospace International Holdings:

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

0.0082 = HK$104m ÷ (HK$14b - HK$1.6b) (Based on the trailing twelve months to December 2024).

So, China Aerospace International Holdings has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Electronic industry average of 6.5%.

Check out our latest analysis for China Aerospace International Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for China Aerospace International Holdings' ROCE against it's prior returns. If you'd like to look at how China Aerospace International Holdings has performed in the past in other metrics, you can view this free graph of China Aerospace International Holdings' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about China Aerospace International Holdings, given the returns are trending downwards. To be more specific, the ROCE was 3.3% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on China Aerospace International Holdings becoming one if things continue as they have.

What We Can Learn From China Aerospace International Holdings' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 38% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Like most companies, China Aerospace International Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While China Aerospace International Holdings 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.

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.