Yahoo Finance International Consolidated Airlines Group (LON:IAG) Will Want To Turn Around Its Return Trends
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at International Consolidated Airlines Group (LON:IAG), it didn't seem to tick all of these boxes.
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. To calculate this metric for International Consolidated Airlines Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = €1.4b ÷ (€39b - €17b) (Based on the trailing twelve months to December 2022).
Therefore, International Consolidated Airlines Group has an ROCE of 6.1%. In absolute terms, that's a low return and it also under-performs the Airlines industry average of 9.5%.
Check out our latest analysis for International Consolidated Airlines Group
In the above chart we have measured International Consolidated Airlines Group'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 International Consolidated Airlines Group.
The Trend Of ROCE
On the surface, the trend of ROCE at International Consolidated Airlines Group doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 6.1%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, International Consolidated Airlines Group's current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
In Conclusion...
In summary, despite lower returns in the short term, we're encouraged to see that International Consolidated Airlines Group is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 57% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you're still interested in International Consolidated Airlines Group it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.
While International Consolidated Airlines Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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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