If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Spring Airlines (SHSE:601021) 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)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Spring Airlines:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.083 = CN¥2.9b ÷ (CN¥43b - CN¥8.6b) (Based on the trailing twelve months to September 2024).
Thus, Spring Airlines has an ROCE of 8.3%. Even though it's in line with the industry average of 7.9%, it's still a low return by itself.
In the above chart we have measured Spring Airlines' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Spring Airlines .
What The Trend Of ROCE Can Tell Us
The returns on capital haven't changed much for Spring Airlines in recent years. The company has consistently earned 8.3% for the last five years, and the capital employed within the business has risen 71% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 20% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.
In Conclusion...
Long story short, while Spring Airlines has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly, the stock has only gained 36% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
On a final note, we've found 2 warning signs for Spring Airlines that we think you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
