Airbus SE’s (EPA:AIR) Investment Returns Are Lagging Its Industry

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Today we are going to look at Airbus SE (EPA:AIR) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the 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.

Return On Capital Employed (ROCE): What is it?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

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 Airbus:

0.064 = €3.5b ÷ (€117b - €62b) (Based on the trailing twelve months to March 2019.)

So, Airbus has an ROCE of 6.4%.

See our latest analysis for Airbus

Is Airbus's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Airbus's ROCE appears to be significantly below the 8.1% average in the Aerospace & Defense industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Separate from how Airbus stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

In our analysis, Airbus's ROCE appears to be 6.4%, compared to 3 years ago, when its ROCE was 5.0%. This makes us think the business might be improving.

ENXTPA:AIR Past Revenue and Net Income, June 17th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Airbus.

Airbus's Current Liabilities And Their Impact On Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.

Airbus has total liabilities of €62b and total assets of €117b. Therefore its current liabilities are equivalent to approximately 53% of its total assets. Airbus's current liabilities are fairly high, making its ROCE look better than otherwise.

Our Take On Airbus's ROCE

Notably, it also has a mediocre ROCE, which to my mind is not an appealing combination. You might be able to find a better investment than Airbus. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

I will like Airbus better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.