Returns On Capital Are Showing Encouraging Signs At Jet2 (LON:JET2)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 when we looked at Jet2 (LON:JET2) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Jet2:

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

0.16 = UK£513m ÷ (UK£5.9b - UK£2.7b) (Based on the trailing twelve months to September 2024).

Thus, Jet2 has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Airlines industry average of 10.0% it's much better.

View our latest analysis for Jet2

Above you can see how the current ROCE for Jet2 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 analyst report for Jet2 .

What Can We Tell From Jet2's ROCE Trend?

We like the trends that we're seeing from Jet2. Over the last five years, returns on capital employed have risen substantially to 16%. The amount of capital employed has increased too, by 58%. So we're very much inspired by what we're seeing at Jet2 thanks to its ability to profitably reinvest capital.

On a side note, Jet2's current liabilities are still rather high at 46% of total assets. 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.

The Key Takeaway

All in all, it's terrific to see that Jet2 is reaping the rewards from prior investments and is growing its capital base. And since the stock has fallen 13% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Like most companies, Jet2 does come with some risks, and we've found 1 warning sign that you should be aware of.

While Jet2 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.