Aircastle Limited’s (NYSE:AYR) Investment Returns Are Lagging Its Industry

Today we’ll evaluate Aircastle Limited (NYSE:AYR) to determine whether it could have potential as an investment idea. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First of all, we’ll work out how to calculate ROCE. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

Or for Aircastle:

0.058 = US$492m ÷ (US$8.6b – US$94m) (Based on the trailing twelve months to June 2019.)

So, Aircastle has an ROCE of 5.8%.

View our latest analysis for Aircastle

Is Aircastle’s ROCE Good?

One way to assess ROCE is to compare similar companies. We can see Aircastle’s ROCE is meaningfully below the Trade Distributors industry average of 9.1%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, Aircastle’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

Take a look at the image below to see how Aircastle’s past growth compares to the average in its industry.

NYSE:AYR Past Revenue and Net Income, October 28th 2019
NYSE:AYR Past Revenue and Net Income, October 28th 2019

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. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Aircastle’s Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.

Aircastle has total assets of US$8.6b and current liabilities of US$94m. As a result, its current liabilities are equal to approximately 1.1% of its total assets. With low levels of current liabilities, at least Aircastle’s mediocre ROCE is not unduly boosted.

Our Take On Aircastle’s ROCE

Aircastle looks like an ok business, but on this analysis it is not at the top of our buy list. You might be able to find a better investment than Aircastle. 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).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.