U.S. Markets open in 4 hrs 38 mins

Why JetBlue Airways Corporation’s (NASDAQ:JBLU) Use Of Investor Capital Doesn’t Look Great

Simply Wall St

Today we are going to look at JetBlue Airways Corporation (NASDAQ:JBLU) 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. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its 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'.

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 JetBlue Airways:

0.092 = US$770m ÷ (US$11b - US$2.9b) (Based on the trailing twelve months to June 2019.)

Therefore, JetBlue Airways has an ROCE of 9.2%.

See our latest analysis for JetBlue Airways

Is JetBlue Airways's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. We can see JetBlue Airways's ROCE is meaningfully below the Airlines industry average of 12%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, JetBlue Airways'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.

We can see that , JetBlue Airways currently has an ROCE of 9.2%, less than the 19% it reported 3 years ago. So investors might consider if it has had issues recently. The image below shows how JetBlue Airways's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NasdaqGS:JBLU Past Revenue and Net Income, August 6th 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.

How JetBlue Airways's Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

JetBlue Airways has total liabilities of US$2.9b and total assets of US$11b. As a result, its current liabilities are equal to approximately 26% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

Our Take On JetBlue Airways's ROCE

With that in mind, we're not overly impressed with JetBlue Airways's ROCE, so it may not be the most appealing prospect. You might be able to find a better investment than JetBlue Airways. 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).

I will like JetBlue Airways 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.