Here’s why JetBlue Airways Corporation’s (NASDAQ:JBLU) Returns On Capital Matters So Much

Today we’ll evaluate JetBlue Airways Corporation (NASDAQ:JBLU) to determine whether it could have potential as an investment idea. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for JetBlue Airways:

0.09 = US$723m ÷ (US$10b – US$2.4b) (Based on the trailing twelve months to December 2018.)

So, JetBlue Airways has an ROCE of 9.0%.

View our latest analysis for JetBlue Airways

Does JetBlue Airways Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see JetBlue Airways’s ROCE is around the 11% average reported by the Airlines industry. Setting aside the industry comparison for now, JetBlue Airways’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

JetBlue Airways’s current ROCE of 9.0% is lower than its ROCE in the past, which was 19%, 3 years ago. Therefore we wonder if the company is facing new headwinds.

NasdaqGS:JBLU Past Revenue and Net Income, April 19th 2019
NasdaqGS:JBLU Past Revenue and Net Income, April 19th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for JetBlue Airways.

What Are Current Liabilities, And How Do They Affect JetBlue Airways’s ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

JetBlue Airways has total assets of US$10b and current liabilities of US$2.4b. As a result, its current liabilities are equal to approximately 23% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

What We Can Learn From JetBlue Airways’s ROCE

If JetBlue Airways continues to earn an uninspiring ROCE, there may be better places to invest. You might be able to find a better investment than JetBlue Airways. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.