Investors Could Be Concerned With 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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. 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 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)?

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 Allegiant Travel is:

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

0.033 = US$117m ÷ (US$4.9b - US$1.3b) (Based on the trailing twelve months to June 2024).

Therefore, Allegiant Travel has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Airlines industry average of 8.4%.

Check out our latest analysis for Allegiant Travel

Above you can see how the current ROCE for Allegiant Travel compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Allegiant Travel .

How Are Returns Trending?

On the surface, the trend of ROCE at Allegiant Travel doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 3.3%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that Allegiant Travel is reinvesting in the business, but returns have been falling. Since the stock has declined 58% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Allegiant Travel does have some risks though, and we've spotted 1 warning sign for Allegiant Travel that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.