Returns Are Gaining Momentum At LATAM Airlines Group (SNSE:LTM)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 at ever-higher rates of return. So on that note, LATAM Airlines Group (SNSE:LTM) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for LATAM Airlines Group:

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

0.16 = US$1.4b ÷ (US$15b - US$6.2b) (Based on the trailing twelve months to September 2024).

So, LATAM Airlines Group has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Airlines industry average of 8.9% it's much better.

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're interested, you can view the analysts predictions in our free analyst report for LATAM Airlines Group .

What Can We Tell From LATAM Airlines Group's ROCE Trend?

We're pretty happy with how the ROCE has been trending at LATAM Airlines Group. The data shows that returns on capital have increased by 184% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, LATAM Airlines Group appears to been achieving more with less, since the business is using 34% less capital to run its operation. 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.

On a separate but related note, it's important to know that LATAM Airlines Group has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From LATAM Airlines Group's ROCE

From what we've seen above, LATAM Airlines Group has managed to increase it's returns on capital all the while reducing it's capital base. Although the company may be facing some issues elsewhere since the stock has plunged 97% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

One more thing: We've identified 3 warning signs with LATAM Airlines Group (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

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.