Here's What's Concerning About Wizz Air Holdings' (LON:WIZZ) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Wizz Air Holdings (LON:WIZZ) 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 Wizz Air Holdings:

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

0.013 = €85m ÷ (€9.2b - €2.8b) (Based on the trailing twelve months to December 2024).

So, Wizz Air Holdings has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Airlines industry average of 9.5%.

See our latest analysis for Wizz Air Holdings

In the above chart we have measured Wizz Air Holdings' 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 Wizz Air Holdings .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Wizz Air Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 12% over the last five years. However it looks like Wizz Air Holdings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Wizz Air Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Wizz Air Holdings' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 52% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to know some of the risks facing Wizz Air Holdings we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Wizz Air Holdings 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.