Why Atlas Air Worldwide Holdings, Inc.’s (NASDAQ:AAWW) Use Of Investor Capital Doesn’t Look Great
Today we are going to look at Atlas Air Worldwide Holdings, Inc. (NASDAQ:AAWW) to see whether it might be an attractive investment prospect. 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
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 Atlas Air Worldwide Holdings:
0.063 = US$295m ÷ (US$5.5b - US$818m) (Based on the trailing twelve months to December 2018.)
Therefore, Atlas Air Worldwide Holdings has an ROCE of 6.3%.
See our latest analysis for Atlas Air Worldwide Holdings
Is Atlas Air Worldwide Holdings's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Atlas Air Worldwide Holdings's ROCE appears to be significantly below the 9.9% average in the Logistics industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, Atlas Air Worldwide Holdings's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
In our analysis, Atlas Air Worldwide Holdings's ROCE appears to be 6.3%, compared to 3 years ago, when its ROCE was 4.0%. This makes us think the business might be improving.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Atlas Air Worldwide Holdings.
What Are Current Liabilities, And How Do They Affect Atlas Air Worldwide Holdings's ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
Atlas Air Worldwide Holdings has total liabilities of US$818m and total assets of US$5.5b. As a result, its current liabilities are equal to approximately 15% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.
What We Can Learn From Atlas Air Worldwide Holdings's ROCE
With that in mind, we're not overly impressed with Atlas Air Worldwide Holdings's ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than Atlas Air Worldwide Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Atlas Air Worldwide Holdings better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
