We Like These Underlying Return On Capital Trends At Air Arabia PJSC (DFM:AIRARABIA)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Air Arabia PJSC (DFM:AIRARABIA) so let's look a bit deeper.

What Is 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. The formula for this calculation on Air Arabia PJSC is:

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

0.10 = د.إ1.1b ÷ (د.إ14b - د.إ3.7b) (Based on the trailing twelve months to December 2022).

So, Air Arabia PJSC has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 9.0% generated by the Airlines industry.

See our latest analysis for Air Arabia PJSC

Above you can see how the current ROCE for Air Arabia PJSC compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Air Arabia PJSC here for free.

What The Trend Of ROCE Can Tell Us

Air Arabia PJSC has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 115% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. 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 Bottom Line

In summary, we're delighted to see that Air Arabia PJSC has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 125% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Air Arabia PJSC can keep these trends up, it could have a bright future ahead.

Air Arabia PJSC does have some risks though, and we've spotted 1 warning sign for Air Arabia PJSC that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.