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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. 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. Having said that, from a first glance at Sun Country Airlines Holdings (NASDAQ:SNCY) 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)
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 Sun Country Airlines Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = US$65m ÷ (US$1.4b - US$301m) (Based on the trailing twelve months to March 2022).
So, Sun Country Airlines Holdings has an ROCE of 5.8%. In absolute terms, that's a low return, but it's much better than the Airlines industry average of 2.5%.
Above you can see how the current ROCE for Sun Country Airlines Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sun Country Airlines Holdings here for free.
The Trend Of ROCE
The returns on capital haven't changed much for Sun Country Airlines Holdings in recent years. The company has employed 112% more capital in the last three years, and the returns on that capital have remained stable at 5.8%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
What We Can Learn From Sun Country Airlines Holdings' ROCE
In conclusion, Sun Country Airlines Holdings has been investing more capital into the business, but returns on that capital haven't increased. And in the last year, the stock has given away 39% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
If you want to continue researching Sun Country Airlines Holdings, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Sun Country Airlines Holdings 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.