How Do JetBlue Airways Corporation’s (NASDAQ:JBLU) Returns On Capital Compare To Peers?

Today we are going to look at JetBlue Airways Corporation (NASDAQ:JBLU) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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 JetBlue Airways:

0.092 = US$770m ÷ (US$11b – US$2.9b) (Based on the trailing twelve months to June 2019.)

So, JetBlue Airways has an ROCE of 9.2%.

Check out our latest analysis for JetBlue Airways

Is JetBlue Airways’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, JetBlue Airways’s ROCE appears to be significantly below the 12% average in the Airlines industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how JetBlue Airways stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.

JetBlue Airways’s current ROCE of 9.2% is lower than 3 years ago, when the company reported a 19% ROCE. So investors might consider if it has had issues recently.

NasdaqGS:JBLU Past Revenue and Net Income, September 10th 2019
NasdaqGS:JBLU Past Revenue and Net Income, September 10th 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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for JetBlue Airways.

Do JetBlue Airways’s Current Liabilities Skew Its ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

JetBlue Airways has total liabilities of US$2.9b and total assets of US$11b. As a result, its current liabilities are equal to approximately 26% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

The Bottom Line On JetBlue Airways’s ROCE

That said, JetBlue Airways’s ROCE is mediocre, there may be more attractive investments around. You might be able to find a better investment than JetBlue Airways. 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).

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.