Capital Allocation Trends At Spring Airlines (SHSE:601021) Aren't Ideal

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. In light of that, when we looked at Spring Airlines (SHSE:601021) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Spring Airlines is:

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

0.069 = CN¥2.2b ÷ (CN¥46b - CN¥14b) (Based on the trailing twelve months to September 2023).

So, Spring Airlines has an ROCE of 6.9%. Ultimately, that's a low return and it under-performs the Airlines industry average of 9.2%.

View our latest analysis for Spring Airlines

In the above chart we have measured Spring Airlines' 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 Spring Airlines .

The Trend Of ROCE

We weren't thrilled with the trend because Spring Airlines' ROCE has reduced by 30% over the last five years, while the business employed 61% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Spring Airlines' earnings and if they change as a result from the capital raise.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Spring Airlines. And the stock has followed suit returning a meaningful 49% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Spring Airlines does come with some risks, and we've found 1 warning sign that you should be aware of.

While Spring Airlines 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. 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.