Yahoo Finance Investors Shouldn't Overlook Qantas Airways' (ASX:QAN) Impressive Returns On Capital
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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, the ROCE of Qantas Airways (ASX:QAN) looks great, so lets see what the trend can tell us.
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. The formula for this calculation on Qantas Airways is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.30 = AU$2.5b ÷ (AU$19b - AU$11b) (Based on the trailing twelve months to December 2023).
Thus, Qantas Airways has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 8.8% earned by companies in a similar industry.
See our latest analysis for Qantas Airways
Above you can see how the current ROCE for Qantas Airways compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Qantas Airways .
What Can We Tell From Qantas Airways' ROCE Trend?
You'd find it hard not to be impressed with the ROCE trend at Qantas Airways. The figures show that over the last five years, returns on capital have grown by 139%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Qantas Airways appears to been achieving more with less, since the business is using 22% less capital to run its operation. Qantas Airways may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 57% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.
The Key Takeaway
From what we've seen above, Qantas Airways has managed to increase it's returns on capital all the while reducing it's capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 17% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Qantas Airways does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.
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