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Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Flight Centre Travel Group (ASX:FLT), we weren't too hopeful.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Flight Centre Travel Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = AU$255m ÷ (AU$4.2b - AU$2.3b) (Based on the trailing twelve months to June 2024).
Thus, Flight Centre Travel Group has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 9.6% it's much better.
Check out our latest analysis for Flight Centre Travel Group
Above you can see how the current ROCE for Flight Centre Travel Group 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 analyst report for Flight Centre Travel Group .
What Can We Tell From Flight Centre Travel Group's ROCE Trend?
In terms of Flight Centre Travel Group's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 20% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Flight Centre Travel Group to turn into a multi-bagger.
On a side note, Flight Centre Travel Group's current liabilities are still rather high at 55% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.