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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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Auckland International Airport (NZSE:AIA) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on Auckland International Airport is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = NZ$269m ÷ (NZ$9.3b - NZ$467m) (Based on the trailing twelve months to June 2020).
Thus, Auckland International Airport has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 8.1%.
See our latest analysis for Auckland International Airport
Above you can see how the current ROCE for Auckland International Airport compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Auckland International Airport.
What Does the ROCE Trend For Auckland International Airport Tell Us?
The trend of ROCE doesn't look fantastic because it's fallen from 6.5% five years ago, while the business's capital employed increased by 84%. That being said, Auckland International Airport raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Auckland International Airport's earnings and if they change as a result from the capital raise.
What We Can Learn From Auckland International Airport's ROCE
We're a bit apprehensive about Auckland International Airport because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these concerning fundamentals, the stock has performed strongly with a 60% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.