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If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Air New Zealand (NZSE:AIR), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Air New Zealand is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = NZ$587m ÷ (NZ$9.2b - NZ$3.8b) (Based on the trailing twelve months to June 2023).
So, Air New Zealand has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Airlines industry average of 9.5%.
Check out our latest analysis for Air New Zealand
Above you can see how the current ROCE for Air New Zealand 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 Air New Zealand.
What Does the ROCE Trend For Air New Zealand Tell Us?
Things have been pretty stable at Air New Zealand, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Air New Zealand to be a multi-bagger going forward. On top of that you'll notice that Air New Zealand has been paying out a large portion (61%) of earnings in the form of dividends to shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.
Another thing to note, Air New Zealand has a high ratio of current liabilities to total assets of 42%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.