Returns On Capital At Air Lease (NYSE:AL) Paint An Interesting Picture
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Air Lease (NYSE:AL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Air Lease, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.054 = US$1.2b ÷ (US$23b - US$440m) (Based on the trailing twelve months to June 2020).
Thus, Air Lease has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 9.0%.
Check out our latest analysis for Air Lease
In the above chart we have measured Air Lease'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 Air Lease here for free.
So How Is Air Lease's ROCE Trending?
There are better returns on capital out there than what we're seeing at Air Lease. The company has consistently earned 5.4% for the last five years, and the capital employed within the business has risen 99% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
In Conclusion...
Long story short, while Air Lease has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly, the stock has only gained 1.5% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
One more thing: We've identified 2 warning signs with Air Lease (at least 1 which can't be ignored) , and understanding them would certainly be useful.
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.
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. 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.
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