If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Aecc Aero-Engine ControlLtd (SZSE:000738) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Aecc Aero-Engine ControlLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.053 = CN¥668m ÷ (CN¥15b - CN¥2.7b) (Based on the trailing twelve months to June 2023).
Thus, Aecc Aero-Engine ControlLtd has an ROCE of 5.3%. In absolute terms, that's a low return, but it's much better than the Aerospace & Defense industry average of 4.3%.
View our latest analysis for Aecc Aero-Engine ControlLtd
In the above chart we have measured Aecc Aero-Engine ControlLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Aecc Aero-Engine ControlLtd here for free.
What Can We Tell From Aecc Aero-Engine ControlLtd's ROCE Trend?
There are better returns on capital out there than what we're seeing at Aecc Aero-Engine ControlLtd. The company has consistently earned 5.3% for the last five years, and the capital employed within the business has risen 114% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line
In summary, Aecc Aero-Engine ControlLtd has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 79% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
If you're still interested in Aecc Aero-Engine ControlLtd it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
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.