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If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at Qantas Airways' (ASX:QAN) look very promising so lets take a look.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Qantas Airways, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = AU$2.2b ÷ (AU$21b - AU$12b) (Based on the trailing twelve months to June 2024).
So, Qantas Airways has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Airlines industry average of 8.5%.
See our latest analysis for Qantas Airways
Above you can see how the current ROCE for Qantas Airways 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 analyst report for Qantas Airways .
What The Trend Of ROCE Can Tell Us
We're pretty happy with how the ROCE has been trending at Qantas Airways. The figures show that over the last five years, returns on capital have grown by 133%. The company is now earning AU$0.2 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 23% less capital than it was five years ago. Qantas Airways may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 57% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
In Conclusion...
From what we've seen above, Qantas Airways has managed to increase it's returns on capital all the while reducing it's capital base. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 21% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.