Yahoo Finance Alaska Air Group (NYSE:ALK) Is Reinvesting At Lower Rates Of Return
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Alaska Air Group (NYSE:ALK) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Alaska Air Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.037 = US$356m ÷ (US$14b - US$4.5b) (Based on the trailing twelve months to December 2022).
Therefore, Alaska Air Group has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Airlines industry average of 4.9%.
Check out our latest analysis for Alaska Air Group
Above you can see how the current ROCE for Alaska Air Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Alaska Air Group here for free.
The Trend Of ROCE
When we looked at the ROCE trend at Alaska Air Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 16% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Alaska Air Group's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Alaska Air Group is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 31% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
On a separate note, we've found 3 warning signs for Alaska Air Group you'll probably want to know about.
While Alaska Air Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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