Today we'll look at Allegiant Travel Company (NASDAQ:ALGT) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
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 Allegiant Travel:
0.12 = US$284m ÷ (US$3.0b - US$607m) (Based on the trailing twelve months to June 2019.)
Therefore, Allegiant Travel has an ROCE of 12%.
Is Allegiant Travel's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. It appears that Allegiant Travel's ROCE is fairly close to the Airlines industry average of 12%. Separate from Allegiant Travel's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, Allegiant Travel currently has an ROCE of 12%, less than the 39% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Allegiant Travel's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and 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. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Allegiant Travel.
Do Allegiant Travel's Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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.
Allegiant Travel has total liabilities of US$607m and total assets of US$3.0b. As a result, its current liabilities are equal to approximately 20% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
The Bottom Line On Allegiant Travel's ROCE
Overall, Allegiant Travel has a decent ROCE and could be worthy of further research. There might be better investments than Allegiant Travel out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
I will like Allegiant Travel better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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