Investors Could Be Concerned With Allegiant Travel's (NASDAQ:ALGT) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Allegiant Travel (NASDAQ:ALGT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

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 Allegiant Travel, this is the formula:

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

0.022 = US$72m ÷ (US$4.0b - US$663m) (Based on the trailing twelve months to December 2021).

Therefore, Allegiant Travel has an ROCE of 2.2%. In absolute terms, that's a low return, but it's much better than the Airlines industry average of 0.8%.

View our latest analysis for Allegiant Travel

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'd like, you can check out the forecasts from the analysts covering Allegiant Travel here for free.

So How Is Allegiant Travel's ROCE Trending?

When we looked at the ROCE trend at Allegiant Travel, we didn't gain much confidence. To be more specific, ROCE has fallen from 30% over the last five years. 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

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Allegiant Travel. These trends are starting to be recognized by investors since the stock has delivered a 12% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a final note, we've found 3 warning signs for Allegiant Travel that we think you should be aware of.

While Allegiant Travel isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.