There Are Reasons To Feel Uneasy About Controladora Vuela Compañía de Aviación. de's (BMV:VOLARA) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Controladora Vuela Compañía de Aviación. de (BMV:VOLARA), it didn't seem to tick all of these boxes.

What is 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. Analysts use this formula to calculate it for Controladora Vuela Compañía de Aviación. de:

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

0.022 = Mex$1.1b ÷ (Mex$74b - Mex$25b) (Based on the trailing twelve months to June 2021).

Therefore, Controladora Vuela Compañía de Aviación. de has an ROCE of 2.2%. In absolute terms, that's a low return, but it's much better than the Airlines industry average of 1.5%.

Check out our latest analysis for Controladora Vuela Compañía de Aviación. de

Above you can see how the current ROCE for Controladora Vuela Compañía de Aviación. de 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 Controladora Vuela Compañía de Aviación. de.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Controladora Vuela Compañía de Aviación. de, we didn't gain much confidence. To be more specific, ROCE has fallen from 25% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Controladora Vuela Compañía de Aviación. de's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 12% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we found 2 warning signs for Controladora Vuela Compañía de Aviación. de (1 doesn't sit too well with us) you should be aware of.

While Controladora Vuela Compañía de Aviación. de 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. 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.
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