This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in AerCap Holdings NV (NYSE:AER).
Purchasing AerCap Holdings gives you an ownership stake in the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Therefore, looking at how efficiently AerCap Holdings is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
What is Return on Capital Employed (ROCE)?
Choosing to invest in AerCap Holdings comes at the cost of investing in another potentially favourable company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. We’ll look at AerCap Holdings’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. AER’s ROCE is calculated below:
ROCE Calculation for AER
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$1.29b ÷ (US$42.02b – US$2.81b) = 3.29%
AER’s 3.29% ROCE means that for every $100 you invest, the company creates $3.3. A good ROCE hurdle you should aim for in your investments is 15%, which AER has missed by a wide margin, meaning the company creates a poor amount of earnings from capital employed.
Then why have investors invested?
AerCap Holdings’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment AerCap Holdings is in an adverse position, but this can change if these factors improve. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking at the past 3 year period shows us that AER weakened investor return on capital employed from 3.74%. The movement in the earnings variable over this time shows a fall from US$1.51b to US$1.29b whilst the amount of capital employed also fell but by a proportionally lesser volume, which suggests the smaller ROCE is due to a decline in earnings relative to capital requirements.
ROCE for AER investors has fallen in the last few years and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and management ability. AerCap Holdings’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.
- Future Outlook: What are well-informed industry analysts predicting for AER’s future growth? Take a look at our free research report of analyst consensus for AER’s outlook.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for AerCap Holdings’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.