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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Delta Air Lines (NYSE:DAL), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Delta Air Lines, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = US$2.7b ÷ (US$73b - US$26b) (Based on the trailing twelve months to September 2022).
Therefore, Delta Air Lines has an ROCE of 5.8%. Even though it's in line with the industry average of 6.1%, it's still a low return by itself.
Check out our latest analysis for Delta Air Lines
Above you can see how the current ROCE for Delta Air Lines compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Delta Air Lines Tell Us?
When we looked at the ROCE trend at Delta Air Lines, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.8% from 16% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line
While returns have fallen for Delta Air Lines in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 37% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Delta Air Lines (of which 1 shouldn't be ignored!) that you should know about.