LATAM Airlines Group (SNSE:LTM) Is Experiencing Growth In Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in LATAM Airlines Group's (SNSE:LTM) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on LATAM Airlines Group is:

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

0.12 = US$1.1b ÷ (US$15b - US$5.7b) (Based on the trailing twelve months to December 2023).

Therefore, LATAM Airlines Group has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Airlines industry.

View our latest analysis for LATAM Airlines Group

In the above chart we have measured LATAM Airlines Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering LATAM Airlines Group for free.

So How Is LATAM Airlines Group's ROCE Trending?

LATAM Airlines Group has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 87% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 37% less capital than it was five years ago. LATAM Airlines Group may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

In Conclusion...

In the end, LATAM Airlines Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. Although the company may be facing some issues elsewhere since the stock has plunged 97% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

LATAM Airlines Group does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those can't be ignored...

While LATAM Airlines Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.