Today we are going to look at Delta Air Lines, Inc. (NYSE:DAL) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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 Delta Air Lines:
0.15 = US$6.4b ÷ (US$63b - US$20b) (Based on the trailing twelve months to September 2019.)
So, Delta Air Lines has an ROCE of 15%.
Does Delta Air Lines Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Delta Air Lines's ROCE is meaningfully higher than the 11% average in the Airlines industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Delta Air Lines sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Delta Air Lines's current ROCE of 15% is lower than 3 years ago, when the company reported a 20% ROCE. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how Delta Air Lines's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Delta Air Lines.
What Are Current Liabilities, And How Do They Affect Delta Air Lines's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
Delta Air Lines has total assets of US$63b and current liabilities of US$20b. Therefore its current liabilities are equivalent to approximately 32% of its total assets. Delta Air Lines has a middling amount of current liabilities, increasing its ROCE somewhat.
Our Take On Delta Air Lines's ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. Delta Air Lines looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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