U.S. Markets closed

Examining Air Lease Corporation’s (NYSE:AL) Weak Return On Capital Employed

Simply Wall St

Today we'll evaluate Air Lease Corporation (NYSE:AL) to determine whether it could have potential as an investment idea. 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.

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

Return On Capital Employed (ROCE): What is it?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

So, How Do We Calculate ROCE?

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 Air Lease:

0.055 = US$1.0b ÷ (US$19b - US$305m) (Based on the trailing twelve months to March 2019.)

Therefore, Air Lease has an ROCE of 5.5%.

Check out our latest analysis for Air Lease

Does Air Lease Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Air Lease's ROCE appears to be significantly below the 8.0% average in the Trade Distributors industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Air Lease stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.

You can see in the image below how Air Lease's ROCE compares to its industry. Click to see more on past growth.

NYSE:AL Past Revenue and Net Income, August 1st 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 Air Lease.

How Air Lease's Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Air Lease has total assets of US$19b and current liabilities of US$305m. As a result, its current liabilities are equal to approximately 1.6% of its total assets. Air Lease has a low level of current liabilities, which have a negligible impact on its already low ROCE.

The Bottom Line On Air Lease's ROCE

Still, investors could probably find more attractive prospects with better performance out there. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.