China Aerospace International Holdings (HKG:31) May Have Issues Allocating Its Capital

What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at China Aerospace International Holdings (HKG:31), so let's see why.

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)

0.0041 = HK$54m ÷ (HK$15b - HK$1.4b) (Based on the trailing twelve months to December 2023).

Thus, China Aerospace International Holdings has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 7.1%.

Check out our latest analysis for China Aerospace International Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating China Aerospace International Holdings' past further, check out this free graph covering China Aerospace International Holdings' past earnings, revenue and cash flow.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at China Aerospace International Holdings. About five years ago, returns on capital were 3.1%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 2 warning signs with China Aerospace International Holdings (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

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.

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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.