If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. With that in mind, the ROCE of Aviation Links (TLV:AVIA) looks decent, right now, so lets see what the trend of returns can tell us.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Aviation Links:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$5.4m ÷ (US$67m - US$34m) (Based on the trailing twelve months to June 2020).
Therefore, Aviation Links has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 3.3% it's much better.
View our latest analysis for Aviation Links
Historical performance is a great place to start when researching a stock so above you can see the gauge for Aviation Links' ROCE against it's prior returns. If you'd like to look at how Aviation Links has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Aviation Links' ROCE Trending?
The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 16% for the last five years, and the capital employed within the business has risen 174% in that time. Since 16% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
On a side note, Aviation Links has done well to reduce current liabilities to 50% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.Our Take On Aviation Links' ROCE
The main thing to remember is that Aviation Links has proven its ability to continually reinvest at respectable rates of return. In light of this, the stock has only gained 35% over the last five years for shareholders who have owned the stock in this period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
One final note, you should learn about the 4 warning signs we've spotted with Aviation Links (including 2 which is don't sit too well with us) .
While Aviation Links 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. 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.
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About TASE:AVIA
Flawless balance sheet average dividend payer.
