Yahoo Finance Air Partner (LON:AIR) Will Be Hoping To Turn Its Returns On Capital Around
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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Having said that, from a first glance at Air Partner (LON:AIR) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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 Air Partner is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = UK£2.6m ÷ (UK£69m - UK£43m) (Based on the trailing twelve months to July 2021).
Thus, Air Partner has an ROCE of 9.7%. In absolute terms, that's a low return, but it's much better than the Airlines industry average of 3.3%.
View our latest analysis for Air Partner
In the above chart we have measured Air Partner's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Air Partner's ROCE Trend?
On the surface, the trend of ROCE at Air Partner doesn't inspire confidence. To be more specific, ROCE has fallen from 27% 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.
On a related note, Air Partner has decreased its current liabilities to 62% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 62% is still pretty high, so those risks are still somewhat prevalent.
The Key Takeaway
To conclude, we've found that Air Partner is reinvesting in the business, but returns have been falling. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think Air Partner has the makings of a multi-bagger.
One final note, you should learn about the 4 warning signs we've spotted with Air Partner (including 1 which is significant) .
While Air Partner 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.
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.
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