Investors Could Be Concerned With InterGlobe Aviation's (NSE:INDIGO) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. However, after investigating InterGlobe Aviation (NSE:INDIGO), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 InterGlobe Aviation is:

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

0.12 = ₹44b ÷ (₹592b - ₹239b) (Based on the trailing twelve months to March 2023).

So, InterGlobe Aviation has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Airlines industry average of 7.4% it's much better.

See our latest analysis for InterGlobe Aviation

Above you can see how the current ROCE for InterGlobe Aviation compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering InterGlobe Aviation here for free.

What Does the ROCE Trend For InterGlobe Aviation Tell Us?

When we looked at the ROCE trend at InterGlobe Aviation, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 12%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 40%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On InterGlobe Aviation's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for InterGlobe Aviation. Furthermore the stock has climbed 83% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know about the risks facing InterGlobe Aviation, we've discovered 1 warning sign that you should be aware of.

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.