Are Alliance Aviation Services Limited’s (ASX:AQZ) High Returns Really That Great?
Today we'll look at Alliance Aviation Services Limited (ASX:AQZ) 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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 Alliance Aviation Services:
0.15 = AU$36m ÷ (AU$302m - AU$56m) (Based on the trailing twelve months to June 2019.)
So, Alliance Aviation Services has an ROCE of 15%.
Check out our latest analysis for Alliance Aviation Services
Is Alliance Aviation Services's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Alliance Aviation Services's ROCE is meaningfully better than the 9.5% average in the Airlines industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Alliance Aviation Services's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Our data shows that Alliance Aviation Services currently has an ROCE of 15%, compared to its ROCE of 9.9% 3 years ago. This makes us wonder if the company is improving. You can see in the image below how Alliance Aviation Services's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Alliance Aviation Services.
What Are Current Liabilities, And How Do They Affect Alliance Aviation Services's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Alliance Aviation Services has total liabilities of AU$56m and total assets of AU$302m. As a result, its current liabilities are equal to approximately 18% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
The Bottom Line On Alliance Aviation Services's ROCE
Overall, Alliance Aviation Services has a decent ROCE and could be worthy of further research. Alliance Aviation Services shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
I will like Alliance Aviation Services better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
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. Thank you for reading.
