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What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Alaska Air Group (NYSE:ALK), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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 Alaska Air Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = US$602m ÷ (US$15b - US$5.2b) (Based on the trailing twelve months to June 2023).
Therefore, Alaska Air Group has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Airlines industry average of 8.2%.
See our latest analysis for Alaska Air Group
In the above chart we have measured Alaska Air Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Alaska Air Group, we didn't gain much confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 6.2%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line On Alaska Air Group's ROCE
While returns have fallen for Alaska Air Group in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 42% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
One more thing: We've identified 2 warning signs with Alaska Air Group (at least 1 which is significant) , and understanding them would certainly be useful.