Investors Could Be Concerned With Alliance Aviation Services' (ASX:AQZ) Returns On Capital
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after briefly looking over the numbers, we don't think Alliance Aviation Services (ASX:AQZ) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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 Alliance Aviation Services is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.099 = AU$66m ÷ (AU$780m - AU$115m) (Based on the trailing twelve months to June 2023).
Therefore, Alliance Aviation Services has an ROCE of 9.9%. On its own, that's a low figure but it's around the 8.6% average generated by the Airlines industry.
See our latest analysis for Alliance Aviation Services
Above you can see how the current ROCE for Alliance Aviation Services compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Alliance Aviation Services.
What Does the ROCE Trend For Alliance Aviation Services Tell Us?
In terms of Alliance Aviation Services' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.9% from 13% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On Alliance Aviation Services' ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Alliance Aviation Services is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 41% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
On a final note, we've found 1 warning sign for Alliance Aviation Services that we think you should be aware of.
While Alliance Aviation Services may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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.
