In This Article:
Today we'll look at Auckland International Airport Limited (NZSE:AIA) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Auckland International Airport:
0.055 = NZ$451m ÷ (NZ$8.7b - NZ$560m) (Based on the trailing twelve months to June 2019.)
Therefore, Auckland International Airport has an ROCE of 5.5%.
Check out our latest analysis for Auckland International Airport
Is Auckland International Airport's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Auckland International Airport's ROCE appears meaningfully below the 8.8% average reported by the Infrastructure industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Auckland International Airport stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
The image below shows how Auckland International Airport's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.