Returns On Capital Signal Tricky Times Ahead For InterGlobe Aviation (NSE:INDIGO)

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think InterGlobe Aviation (NSE:INDIGO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for InterGlobe Aviation, this is the formula:

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

0.10 = ₹26b ÷ (₹505b - ₹251b) (Based on the trailing twelve months to December 2022).

So, InterGlobe Aviation has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Airlines industry average of 8.4% 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 to see what analysts are forecasting going forward, you should check out our free report for InterGlobe Aviation.

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. Over the last five years, returns on capital have decreased to 10% from 19% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, InterGlobe Aviation's current liabilities have increased over the last five years to 50% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 10%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line

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 42% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

InterGlobe Aviation does have some risks though, and we've spotted 1 warning sign for InterGlobe Aviation that you might be interested in.

While InterGlobe Aviation 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.