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. 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 briefly looking over the numbers, we don't think AECC Aviation PowerLtd (SHSE:600893) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. The formula for this calculation on AECC Aviation PowerLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = CN¥1.2b ÷ (CN¥107b - CN¥68b) (Based on the trailing twelve months to September 2023).
So, AECC Aviation PowerLtd has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 5.0%.
In the above chart we have measured AECC Aviation PowerLtd's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for AECC Aviation PowerLtd.
What Does the ROCE Trend For AECC Aviation PowerLtd Tell Us?
When we looked at the ROCE trend at AECC Aviation PowerLtd, we didn't gain much confidence. To be more specific, ROCE has fallen from 5.6% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 64%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 3.0%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.
The Bottom Line
To conclude, we've found that AECC Aviation PowerLtd is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 45% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
If you want to continue researching AECC Aviation PowerLtd, you might be interested to know about the 1 warning sign that our analysis has discovered.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.