U.S. Markets open in 7 hrs 42 mins

Why Auckland International Airport Limited’s (NZSE:AIA) Return On Capital Employed Is Impressive

Jodi Pearce

Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!

Today we are going to look at Auckland International Airport Limited (NZSE:AIA) 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, 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 measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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?

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 Auckland International Airport:

0.055 = NZ$418m ÷ (NZ$8.3b – NZ$402m) (Based on the trailing twelve months to December 2018.)

Therefore, Auckland International Airport has an ROCE of 5.5%.

Check out our latest analysis for Auckland International Airport

Is Auckland International Airport’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Auckland International Airport’s ROCE is meaningfully higher than the 3.8% average in the Infrastructure industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the industry comparison for now, Auckland International Airport’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

NZSE:AIA Past Revenue and Net Income, February 25th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Auckland International Airport’s Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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.

Auckland International Airport has total liabilities of NZ$402m and total assets of NZ$8.3b. As a result, its current liabilities are equal to approximately 4.8% of its total assets. With low levels of current liabilities, at least Auckland International Airport’s mediocre ROCE is not unduly boosted.

Our Take On Auckland International Airport’s ROCE

Auckland International Airport looks like an ok business, but on this analysis it is not at the top of our buy list. You might be able to find a better buy than Auckland International Airport. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.