Returns On Capital At American Airlines Group (NASDAQ:AAL) Have Stalled

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at American Airlines Group (NASDAQ:AAL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on American Airlines Group is:

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

0.12 = US$5.2b ÷ (US$67b - US$24b) (Based on the trailing twelve months to June 2023).

Thus, American Airlines Group has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Airlines industry average of 8.2% it's much better.

See our latest analysis for American Airlines Group

Above you can see how the current ROCE for American Airlines Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is American Airlines Group's ROCE Trending?

Over the past five years, American Airlines Group's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if American Airlines Group doesn't end up being a multi-bagger in a few years time.

In Conclusion...

We can conclude that in regards to American Airlines Group's returns on capital employed and the trends, there isn't much change to report on. And investors appear hesitant that the trends will pick up because the stock has fallen 63% in the last five years. Therefore based on the analysis done in this article, we don't think American Airlines Group has the makings of a multi-bagger.

If you'd like to know about the risks facing American Airlines Group, we've discovered 2 warning signs that you should be aware of.

While American Airlines Group 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.