Here's What's Concerning About Allegiant Travel's (NASDAQ:ALGT) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Allegiant Travel (NASDAQ:ALGT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. Analysts use this formula to calculate it for Allegiant Travel:

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

0.026 = US$92m ÷ (US$4.4b - US$918m) (Based on the trailing twelve months to June 2022).

So, Allegiant Travel has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Airlines industry average of 5.8%.

Check out the opportunities and risks within the US Airlines industry.

In the above chart we have measured Allegiant Travel's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Allegiant Travel's ROCE Trend?

On the surface, the trend of ROCE at Allegiant Travel doesn't inspire confidence. Around five years ago the returns on capital were 24%, but since then they've fallen to 2.6%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Allegiant Travel's ROCE

While returns have fallen for Allegiant Travel in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 38% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 4 warning signs we've spotted with Allegiant Travel (including 1 which makes us a bit uncomfortable) .

While Allegiant Travel 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.