If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at American Airlines Group (NASDAQ:AAL) and its ROCE trend, we weren’t exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on American Airlines Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.12 = US$4.9b ÷ (US$66b – US$24b) (Based on the trailing twelve months to September 2023).
Therefore, American Airlines Group has an ROCE of 12%. That’s a relatively normal return on capital, and it’s around the 10% generated by the Airlines industry.
View our latest analysis for American Airlines Group
In the above chart we have measured American Airlines Group’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 American Airlines Group here for free.
So How Is American Airlines Group’s ROCE Trending?
There hasn’t been much to report for American Airlines Group’s returns and its level of capital employed because both metrics have been steady for the past five years. It’s not uncommon to see this when looking at a mature and stable business that isn’t re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn’t expect American Airlines Group to be a multi-bagger going forward.
The Bottom Line On American Airlines Group’s ROCE
In a nutshell, American Airlines Group has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has declined 62% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn’t have these traits of a multi-bagger discussed above, so if that’s what you’re looking for, we think you’d have more luck elsewhere.
If you want to know some of the risks facing American Airlines Group we’ve found 3 warning signs (2 shouldn’t be ignored!) that you should be aware of before investing here.
While American Airlines Group may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.