Investors may worry about Air Lease’s return on capital (NYSE:AL)
There are a few key trends to look out for if we want to identify the next multi-bagger. Ideally, a business will show two trends; first growth come back on capital employed (ROCE) and on the other hand, growth amount capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. However, after investigating Air rental (NYSE:AL), we don’t think current trends fit the mold of a multi-bagger.
What is return on capital employed (ROCE)?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for Air Lease, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.044 = $1.2 billion ÷ ($27 billion – $544 million) (Based on the last twelve months to March 2022).
Thereby, Air Lease posted a ROCE of 4.4%. Ultimately, it’s a poor performer and it underperforms the commercial distributor industry average by 14%.
Discover our latest analysis for Air Lease
Above, you can see how Air Lease’s current ROCE compares to its past returns on capital, but you can’t tell much about the past. If you wish, you can view analyst forecasts covering Air Lease here for free.
What is the return trend?
In terms of historical Air Lease ROCE movements, the trend is not fantastic. To be more specific, ROCE has fallen by 6.1% over the past five years. Although, given that revenue and the amount of assets used in the business have increased, it could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. If these investments prove successful, it can bode very well for long-term stock performance.
ROCE of our take on Air Lease
In summary, despite lower returns in the short term, we are encouraged to see that Air Lease is reinvesting for growth and has thus increased its sales. These trends are beginning to be recognized by investors as the stock has delivered a 2.6% gain to shareholders who have held it over the past five years. This security can therefore still be an attractive investment opportunity, if other fundamentals prove to be sound.
One last note, you should inquire about the 3 warning signs we spotted some with Air Lease (including 2 that are a bit worrying).
Although Air Lease does not generate the highest return, check out this free list of companies that achieve high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.