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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Alliance Aviation Services (ASX:AQZ) so let's look a bit deeper.
Understanding 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. To calculate this metric for Alliance Aviation Services, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = AU$65m ÷ (AU$471m - AU$58m) (Based on the trailing twelve months to December 2020).
Therefore, Alliance Aviation Services has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Airlines industry average of 1.7% it's much better.
View our latest analysis for Alliance Aviation Services
Above you can see how the current ROCE for Alliance Aviation Services 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 Alliance Aviation Services here for free.
What Does the ROCE Trend For Alliance Aviation Services Tell Us?
We like the trends that we're seeing from Alliance Aviation Services. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 16%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 115%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
Our Take On Alliance Aviation Services' ROCE
To sum it up, Alliance Aviation Services has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 525% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.