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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings back into the business at ever-higher rates of return. So on that note, Regional Express Holdings (ASX:REX) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Regional Express Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.098 = AU$21m ÷ (AU$274m - AU$59m) (Based on the trailing twelve months to December 2019).
Therefore, Regional Express Holdings has an ROCE of 9.8%. On its own, that's a low figure but it's around the 9.1% average generated by the Airlines industry.
Check out our latest analysis for Regional Express Holdings
Historical performance is a great place to start when researching a stock so above you can see the gauge for Regional Express Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Regional Express Holdings, check out these free graphs here.
So How Is Regional Express Holdings' ROCE Trending?
Regional Express Holdings' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 79% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Key Takeaway
In summary, we're delighted to see that Regional Express Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 40% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you want to continue researching Regional Express Holdings, you might be interested to know about the 3 warning signs that our analysis has discovered.
While Regional Express Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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. 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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About ASX:REX
Regional Express Holdings
Engages in the air transportation of passengers and freight.
Moderate and slightly overvalued.
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