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Shareholders Should Look Hard At Air Transport Services Group, Inc.’s (NASDAQ:ATSG) 6.6%Return On Capital

Simply Wall St
·4 mins read

Today we are going to look at Air Transport Services Group, Inc. (NASDAQ:ATSG) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

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 Transport Services Group:

0.066 = US$168m ÷ (US$2.8b - US$263m) (Based on the trailing twelve months to December 2019.)

So, Air Transport Services Group has an ROCE of 6.6%.

Check out our latest analysis for Air Transport Services Group

Is Air Transport Services Group's ROCE Good?

One way to assess ROCE is to compare similar companies. We can see Air Transport Services Group's ROCE is meaningfully below the Logistics industry average of 12%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Air Transport Services Group stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.

The image below shows how Air Transport Services Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NasdaqGS:ATSG Past Revenue and Net Income April 30th 2020
NasdaqGS:ATSG Past Revenue and Net Income April 30th 2020

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 Transport Services Group.

Air Transport Services Group'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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Air Transport Services Group has total assets of US$2.8b and current liabilities of US$263m. Therefore its current liabilities are equivalent to approximately 9.3% of its total assets. Air Transport Services Group has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.

What We Can Learn From Air Transport Services Group's ROCE

Air Transport Services Group looks like an ok business, but on this analysis it is not at the top of our buy list. 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).

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.

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. Thank you for reading.