If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So when we looked at AVIC (Chengdu)UAS (SHSE:688297) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for AVIC (Chengdu)UAS:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = CN¥270m ÷ (CN¥7.5b - CN¥1.6b) (Based on the trailing twelve months to June 2023).
So, AVIC (Chengdu)UAS has an ROCE of 4.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.6%.
View our latest analysis for AVIC (Chengdu)UAS
Above you can see how the current ROCE for AVIC (Chengdu)UAS compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for AVIC (Chengdu)UAS.
So How Is AVIC (Chengdu)UAS' ROCE Trending?
AVIC (Chengdu)UAS has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses four years ago, but now it's earning 4.6% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, AVIC (Chengdu)UAS is utilizing 1,712% more capital than it was four years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
Our Take On AVIC (Chengdu)UAS' ROCE
To the delight of most shareholders, AVIC (Chengdu)UAS has now broken into profitability. Given the stock has declined 12% in the last year, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
On a separate note, we've found 1 warning sign for AVIC (Chengdu)UAS you'll probably want to know about.
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.