Spring Airlines' (SHSE:601021) Returns Have Hit A Wall

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Having said that, from a first glance at Spring Airlines (SHSE:601021) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Spring Airlines:

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

0.083 = CN¥2.9b ÷ (CN¥43b - CN¥8.6b) (Based on the trailing twelve months to September 2024).

Therefore, Spring Airlines has an ROCE of 8.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.8%.

See our latest analysis for Spring Airlines

Above you can see how the current ROCE for Spring Airlines compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Spring Airlines .

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Spring Airlines. The company has employed 71% more capital in the last five years, and the returns on that capital have remained stable at 8.3%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 20% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Spring Airlines' ROCE

In conclusion, Spring Airlines has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 44% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Spring Airlines does have some risks though, and we've spotted 2 warning signs for Spring Airlines that you might be interested in.

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.