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Aegean Airlines S.A. (ATH:AEGN) Earns Among The Best Returns In Its Industry

Simply Wall St

Today we are going to look at Aegean Airlines S.A. (ATH:AEGN) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Aegean Airlines:

0.14 = €103m ÷ (€1.5b - €724m) (Based on the trailing twelve months to September 2019.)

Therefore, Aegean Airlines has an ROCE of 14%.

See our latest analysis for Aegean Airlines

Does Aegean Airlines Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Aegean Airlines's ROCE is meaningfully better than the 10% average in the Airlines industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where Aegean Airlines sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Aegean Airlines's current ROCE of 14% is lower than its ROCE in the past, which was 27%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how Aegean Airlines's past growth compares to other companies.

ATSE:AEGN Past Revenue and Net Income, March 17th 2020

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Aegean Airlines.

How Aegean Airlines's Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.

Aegean Airlines has total assets of €1.5b and current liabilities of €724m. As a result, its current liabilities are equal to approximately 50% of its total assets. Aegean Airlines has a middling amount of current liabilities, increasing its ROCE somewhat.

The Bottom Line On Aegean Airlines's ROCE

While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Aegean Airlines shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

I will like Aegean Airlines better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.