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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Auckland International Airport (NZSE:AIA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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 Auckland International Airport:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.035 = NZ$457m ÷ (NZ$14b - NZ$567m) (Based on the trailing twelve months to December 2024).
Thus, Auckland International Airport has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 6.0%.
See our latest analysis for Auckland International Airport
In the above chart we have measured Auckland International Airport's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Auckland International Airport for free.
What The Trend Of ROCE Can Tell Us
Unfortunately, the trend isn't great with ROCE falling from 5.4% five years ago, while capital employed has grown 56%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Auckland International Airport might not have received a full period of earnings contribution from it.
The Bottom Line On Auckland International Airport's ROCE
While returns have fallen for Auckland International Airport in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 4.2% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.