These Return Metrics Don't Make China Aerospace International Holdings (HKG:31) Look Too Strong

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into China Aerospace International Holdings (HKG:31), we weren't too upbeat about how things were going.

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

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. The formula for this calculation on China Aerospace International Holdings is:

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

0.006 = HK$76m ÷ (HK$14b - HK$1.5b) (Based on the trailing twelve months to June 2024).

Therefore, China Aerospace International Holdings has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 7.5%.

View 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.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at China Aerospace International Holdings. Unfortunately the returns on capital have diminished from the 2.9% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. 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.

The Bottom Line

In summary, it's unfortunate that China Aerospace International Holdings is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 7.7% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing to note, we've identified 2 warning signs with China Aerospace International Holdings and understanding these should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.