If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. With that in mind, we've noticed some promising trends at AVIC (Chengdu)UAS (SHSE:688297) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for AVIC (Chengdu)UAS, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = CN¥328m ÷ (CN¥7.5b - CN¥1.7b) (Based on the trailing twelve months to December 2023).
Therefore, AVIC (Chengdu)UAS has an ROCE of 5.6%. In absolute terms, that's a low return but it's around the Aerospace & Defense industry average of 5.0%.
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, you can check out the forecasts from the analysts covering AVIC (Chengdu)UAS here for free.
What Does the ROCE Trend For AVIC (Chengdu)UAS Tell Us?
The fact that AVIC (Chengdu)UAS is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses four years ago, but now it's earning 5.6% which is a sight for sore eyes. In addition to that, AVIC (Chengdu)UAS is employing 1,524% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
What We Can Learn From AVIC (Chengdu)UAS' ROCE
To the delight of most shareholders, AVIC (Chengdu)UAS has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 32% in the last year. 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.
While AVIC (Chengdu)UAS 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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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.