To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating AviChina Industry & Technology (HKG:2357), we don't think it's current trends fit the mold of a multi-bagger.
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. To calculate this metric for AviChina Industry & Technology, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.054 = CN¥5.0b ÷ (CN¥178b - CN¥84b) (Based on the trailing twelve months to June 2023).
Thus, AviChina Industry & Technology has an ROCE of 5.4%. In absolute terms, that's a low return but it's around the Aerospace & Defense industry average of 6.3%.
Check out our latest analysis for AviChina Industry & Technology
SEHK:2357 Return on Capital Employed January 11th 2024
In the above chart we have measured AviChina Industry & Technology'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 AviChina Industry & Technology's ROCE Trend?
The trend of ROCE doesn't look fantastic because it's fallen from 6.7% five years ago, while the business's capital employed increased by 136%. Usually this isn't ideal, but given AviChina Industry & Technology conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence AviChina Industry & Technology might not have received a full period of earnings contribution from it. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.
On a separate but related note, it's important to know that AviChina Industry & Technology has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by AviChina Industry & Technology's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 29% in the last five years. Therefore based on the analysis done in this article, we don't think AviChina Industry & Technology has the makings of a multi-bagger.
AviChina Industry & Technology does have some risks though, and we've spotted 1 warning sign for AviChina Industry & Technology that you might be interested in.
While AviChina Industry & Technology 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.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. 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.
