Qantas Airways (ASX:QAN) Knows How To Allocate Capital Effectively

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Qantas Airways' (ASX:QAN) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Qantas Airways, this is the formula:

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

0.33 = AU$2.7b ÷ (AU$20b - AU$12b) (Based on the trailing twelve months to June 2023).

Thus, Qantas Airways has an ROCE of 33%. That's a fantastic return and not only that, it outpaces the average of 8.6% earned by companies in a similar industry.

View our latest analysis for Qantas Airways

Above you can see how the current ROCE for Qantas Airways compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Qantas Airways.

What Does the ROCE Trend For Qantas Airways Tell Us?

You'd find it hard not to be impressed with the ROCE trend at Qantas Airways. The data shows that returns on capital have increased by 140% over the trailing five years. The company is now earning AU$0.3 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 25% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 59% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line

In a nutshell, we're pleased to see that Qantas Airways has been able to generate higher returns from less capital. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know about the risks facing Qantas Airways, we've discovered 1 warning sign that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.