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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Southwest Airlines (NYSE:LUV) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding 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. Analysts use this formula to calculate it for Southwest Airlines:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.015 = US$321m ÷ (US$34b - US$12b) (Based on the trailing twelve months to December 2024).
Therefore, Southwest Airlines has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Airlines industry average of 8.4%.
View our latest analysis for Southwest Airlines
In the above chart we have measured Southwest Airlines' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Southwest Airlines .
How Are Returns Trending?
We weren't thrilled with the trend because Southwest Airlines' ROCE has reduced by 91% over the last five years, while the business employed 27% more capital. Usually this isn't ideal, but given Southwest Airlines conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Southwest Airlines might not have received a full period of earnings contribution from it.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by Southwest Airlines' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 43% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.