U.S. Markets closed

Don’t Buy Air T, Inc. (NASDAQ:AIRT) Until You Understand Its ROCE

Simply Wall St

Today we'll look at Air T, Inc. (NASDAQ:AIRT) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding 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. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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?

The formula for calculating the return on capital employed is:

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

Or for Air T:

0.091 = US$6.7m ÷ (US$134m - US$60m) (Based on the trailing twelve months to June 2019.)

Therefore, Air T has an ROCE of 9.1%.

View our latest analysis for Air T

Does Air T Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that Air T's ROCE is fairly close to the Logistics industry average of 10%. Separate from how Air T stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

Our data shows that Air T currently has an ROCE of 9.1%, compared to its ROCE of 6.2% 3 years ago. This makes us wonder if the company is improving. The image below shows how Air T's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NasdaqGM:AIRT Past Revenue and Net Income, October 18th 2019

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. ROCE is only a point-in-time measure. You can check if Air T has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Air T's Current Liabilities And Their Impact On Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Air T has total assets of US$134m and current liabilities of US$60m. As a result, its current liabilities are equal to approximately 45% of its total assets. Air T's ROCE is improved somewhat by its moderate amount of current liabilities.

What We Can Learn From Air T's ROCE

Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. You might be able to find a better investment than Air T. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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

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.

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. Thank you for reading.