The Return Trends At Cathay Pacific Airways (HKG:293) Look Promising

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Cathay Pacific Airways (HKG:293) 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. The formula for this calculation on Cathay Pacific Airways is:

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

0.019 = HK$2.7b ÷ (HK$187b - HK$42b) (Based on the trailing twelve months to June 2022).

Therefore, Cathay Pacific Airways has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Airlines industry average of 6.3%.

See our latest analysis for Cathay Pacific Airways

In the above chart we have measured Cathay Pacific Airways' 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 report on analyst forecasts for the company.

How Are Returns Trending?

Shareholders will be relieved that Cathay Pacific Airways has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 1.9% on its capital. While returns have increased, the amount of capital employed by Cathay Pacific Airways has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

The Key Takeaway

In summary, we're delighted to see that Cathay Pacific Airways has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 11% 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.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.