U.S. Markets open in 9 hrs 28 mins

Why You Should Care About Aircastle Limited’s (NYSE:AYR) Low Return On Capital

Simply Wall St

Want to participate in a research study? Help shape the future of investing tools and earn a $60 gift card!

Today we are going to look at Aircastle Limited (NYSE:AYR) 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. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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.'

So, How Do We Calculate ROCE?

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 Aircastle:

0.059 = US$458m ÷ (US$7.9b - US$102m) (Based on the trailing twelve months to December 2018.)

So, Aircastle has an ROCE of 5.9%.

See our latest analysis for Aircastle

Is Aircastle's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Aircastle's ROCE appears to be significantly below the 8.1% average in the Trade Distributors 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, Aircastle's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

NYSE:AYR Past Revenue and Net Income, April 5th 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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect Aircastle'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.

Aircastle has total assets of US$7.9b and current liabilities of US$102m. As a result, its current liabilities are equal to approximately 1.3% of its total assets. With low levels of current liabilities, at least Aircastle's mediocre ROCE is not unduly boosted.

The Bottom Line On Aircastle's ROCE

If performance improves, then Aircastle may be an OK investment, especially at the right valuation. But note: Aircastle may not be the best stock to buy. 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.