What Do The Returns On Capital At Auckland International Airport (NZSE:AIA) Tell Us?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Auckland International Airport (NZSE:AIA) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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 Auckland International Airport, this is the formula:

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

0.03 = NZ$269m ÷ (NZ$9.3b - NZ$467m) (Based on the trailing twelve months to June 2020).

So, Auckland International Airport has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 7.9%.

Check out our latest analysis for Auckland International Airport

Above you can see how the current ROCE for Auckland International Airport 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 Auckland International Airport here for free.

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 6.5% five years ago, while capital employed has grown 84%. Usually this isn't ideal, but given Auckland International Airport conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Auckland International Airport probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

What We Can Learn From Auckland International Airport's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Auckland International Airport have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 45% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing to note, we've identified 2 warning signs with Auckland International Airport and understanding these should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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