We're Watching These Trends At Aerospace Industrial Development (TPE:2634)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Aerospace Industrial Development (TPE:2634) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Aerospace Industrial Development:

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

0.04 = NT$955m ÷ (NT$45b - NT$21b) (Based on the trailing twelve months to September 2020).

So, Aerospace Industrial Development has an ROCE of 4.0%. Even though it's in line with the industry average of 4.0%, it's still a low return by itself.

See our latest analysis for Aerospace Industrial Development

In the above chart we have measured Aerospace Industrial Development's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Aerospace Industrial Development's ROCE Trend?

In terms of Aerospace Industrial Development's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 16%, but since then they've fallen to 4.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a separate but related note, it's important to know that Aerospace Industrial Development has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Aerospace Industrial Development's ROCE

We're a bit apprehensive about Aerospace Industrial Development because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 10% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Aerospace Industrial Development we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Aerospace Industrial Development isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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