This article is intended for those of you who are at the beginning of your investing journey and want a simplistic look at the return on China Aerospace International Holdings Limited (HKG:31) stock.
Purchasing China Aerospace International Holdings gives you an ownership stake in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Therefore, looking at how efficiently China Aerospace International Holdings is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
Calculating Return On Capital Employed for 31
Choosing to invest in China Aerospace International Holdings comes at the cost of investing in another potentially favourable company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if China Aerospace International Holdings is good at growing investor capital. I have calculated China Aerospace International Holdings’s ROCE for you below:
ROCE Calculation for 31
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = HK$512m ÷ (HK$14.4b – HK$1.4b) = 3.9%
As you can see, 31 earned HK$3.9 from every HK$100 you invested over the previous twelve months. This shows China Aerospace International Holdings provides an unsatisfying capital return that is well below the 15% ROCE that is typically considered to be a strong benchmark. Nevertheless, if 31 is clever with their reinvestments or dividend payments, investors can still grow their capital although to a poor extent.
Then why have investors invested?
Although China Aerospace International Holdings is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Looking at the past 3 year period shows us that 31 boosted investor return on capital employed from 2.4%. With this, the current earnings of HK$512m improved from HK$232m and capital employed also increased but to a smaller extent, which means the company has been able to improve ROCE by driving up earnings relative to the capital invested in the business.
Although China Aerospace International Holdings’s ROCE is currently below the acceptable benchmark, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and management ability to determine whether there is potential for return by focusing our attention elsewhere. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate 31 or move on to other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for 31’s future growth? Take a look at our free research report of analyst consensus for 31’s outlook.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for China Aerospace International Holdings’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.