Auckland International Airport (NZSE:AIA) May Have Issues Allocating Its Capital
If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Auckland International Airport (NZSE:AIA) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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 Auckland International Airport:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.004 = NZ$38m ÷ (NZ$10b - NZ$610m) (Based on the trailing twelve months to June 2022).
Thus, Auckland International Airport has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 4.8%.
View 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 to see what analysts are forecasting going forward, you should check out our free report for Auckland International Airport.
What Does the ROCE Trend For Auckland International Airport Tell Us?
On the surface, the trend of ROCE at Auckland International Airport doesn't inspire confidence. To be more specific, ROCE has fallen from 6.6% over the last five years. However it looks like Auckland International Airport might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
What We Can Learn From Auckland International Airport's ROCE
To conclude, we've found that Auckland International Airport is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 40% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
On a separate note, we've found 2 warning signs for Auckland International Airport you'll probably want to know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
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