Yahoo Finance Air Lease (NYSE:AL) Hasn't Managed To Accelerate Its Returns
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Having said that, from a first glance at Air Lease (NYSE:AL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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 Air Lease:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = US$1.4b ÷ (US$31b - US$1.2b) (Based on the trailing twelve months to March 2024).
Therefore, Air Lease has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 13%.
See our latest analysis for Air Lease
In the above chart we have measured Air Lease'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 Air Lease for free.
So How Is Air Lease's ROCE Trending?
The returns on capital haven't changed much for Air Lease in recent years. Over the past five years, ROCE has remained relatively flat at around 4.7% and the business has deployed 59% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
What We Can Learn From Air Lease's ROCE
In summary, Air Lease has simply been reinvesting capital and generating the same low rate of return as before. And with the stock having returned a mere 26% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Air Lease does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...
While Air Lease 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
