These Return Metrics Don't Make AAR (NYSE:AIR) Look Too Strong

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into AAR (NYSE:AIR), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on AAR is:

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

0.047 = US$57m ÷ (US$1.5b - US$320m) (Based on the trailing twelve months to November 2021).

So, AAR has an ROCE of 4.7%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 9.4%.

See our latest analysis for AAR

In the above chart we have measured AAR's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for AAR.

What Can We Tell From AAR's ROCE Trend?

In terms of AAR's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.2% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on AAR becoming one if things continue as they have.

The Bottom Line On AAR's ROCE

In summary, it's unfortunate that AAR is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 21% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to continue researching AAR, you might be interested to know about the 1 warning sign that our analysis has discovered.

While AAR 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.