Flight Centre Travel Group (ASX:FLT) Will Be Hoping To Turn Its Returns On Capital Around
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Flight Centre Travel Group (ASX:FLT) and its ROCE trend, we weren't exactly thrilled.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Flight Centre Travel Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.065 = AU$160m ÷ (AU$4.4b - AU$2.0b) (Based on the trailing twelve months to June 2023).
Thus, Flight Centre Travel Group has an ROCE of 6.5%. On its own, that's a low figure but it's around the 6.5% average generated by the Hospitality industry.
View our latest analysis for Flight Centre Travel Group
In the above chart we have measured Flight Centre Travel Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Flight Centre Travel Group here for free.
What Can We Tell From Flight Centre Travel Group's ROCE Trend?
On the surface, the trend of ROCE at Flight Centre Travel Group doesn't inspire confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 6.5%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, Flight Centre Travel Group's current liabilities are still rather high at 44% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
In Conclusion...
In summary, despite lower returns in the short term, we're encouraged to see that Flight Centre Travel Group is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 39% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
If you'd like to know about the risks facing Flight Centre Travel Group, we've discovered 2 warning signs that 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
