Investors encounter slowing returns on capital at BOC Aviation (HKG: 2588)

To find a multi-bagger stock, what are the underlying trends to look for in a business? Generally, we will want to notice a growing trend return on capital employed (ROCE) and at the same time, a based capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Although when we looked BOC Aviation (HKG: 2588), it didn’t seem to tick all of those boxes.

Return on capital employed (ROCE): what is it?

For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. The formula for this calculation on BOC Aviation is:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.058 = $ 1.2 billion ÷ ($ 24 billion – $ 2.2 billion) (Based on the last twelve months up to December 2020).

So, BOC Aviation has a ROCE of 5.8%. On its own, that’s a low return, but compared to the 3.7% industry average generated from commercial distributors, it’s much better.

See our latest review for BOC Aviation

SEHK: 2588 return on capital employed May 24, 2021

Above you can see how BOC Aviation’s current ROCE compares to its past returns on capital, but you can’t say more about the past. If you want, you can check out the analysts’ forecasts covering BOC Aviation here for free.

What can we say about BOC Aviation’s ROCE trend?

Returns on capital have not changed much for BOC Aviation in recent years. The company has steadily gained 5.8% over the past five years, and the capital employed within the company has increased by 90% during this period. As the company has increased the amount of capital employed, it appears that the investments that have been made are simply not delivering a high return on capital.

The key to take away

As we have seen above, BOC Aviation’s returns on capital have not increased but are reinvesting in the business. Although the market should expect these trends to improve as the stock has gained 63% in the past three years. Ultimately, if the underlying trends persist, we wouldn’t hold our breath that this is a multi-bagger in the future.

BOC Aviation has certain risks, we have noticed 3 warning signs (and 1 which makes us a little uncomfortable) we think you should know.

Although BOC Aviation doesn’t get the highest return, check out this free list of companies that achieve high returns on their equity with strong balance sheets.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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