The Return Trends At China Aerospace International Holdings (HKG:31) Look Promising
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, China Aerospace International Holdings (HKG:31) looks quite promising in regards to its trends of return on capital.
What is Return On Capital Employed (ROCE)?
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. 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)
0.03 = HK$430m ÷ (HK$16b - HK$1.6b) (Based on the trailing twelve months to December 2020).
Therefore, China Aerospace International Holdings has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 8.6%.
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 past earnings, revenue and cash flow.
What Can We Tell From China Aerospace International Holdings' ROCE Trend?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 3.0%. The amount of capital employed has increased too, by 52%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
One more thing to note, China Aerospace International Holdings has decreased current liabilities to 10% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
Our Take On China Aerospace International Holdings' ROCE
All in all, it's terrific to see that China Aerospace International Holdings is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 11% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.
China Aerospace International Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...
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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About SEHK:31
China Aerospace International Holdings
An investment holding company, operates hi-tech manufacturing and aerospace service business in Hong Kong, the People’s Republic of China, and internationally.
Adequate balance sheet and slightly overvalued.