Auckland International Airport (NZSE:AIA) Might Be Having Difficulty Using Its Capital Effectively
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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Auckland International Airport (NZSE:AIA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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 Auckland International Airport:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0067 = NZ$58m ÷ (NZ$9.2b - NZ$484m) (Based on the trailing twelve months to December 2020).
So, Auckland International Airport has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 7.9%.
View our latest analysis for Auckland International Airport
In the above chart we have measured Auckland International Airport'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 Auckland International Airport's ROCE Trend?
We weren't thrilled with the trend because Auckland International Airport's ROCE has reduced by 90% over the last five years, while the business employed 79% more capital. Usually this isn't ideal, but given Auckland International Airport conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Auckland International Airport might not have received a full period of earnings contribution from it.
The Bottom Line On Auckland International Airport's ROCE
We're a bit apprehensive about Auckland International Airport because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 30% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
On a final note, we've found 2 warning signs for Auckland International Airport that we think you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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. 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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