Investors Could Be Concerned With SkyWest's (NASDAQ:SKYW) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating SkyWest (NASDAQ:SKYW), we don't think it's current trends fit the mold of a multi-bagger.

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 SkyWest:

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

0.02 = US$124m ÷ (US$7.2b - US$1.2b) (Based on the trailing twelve months to March 2023).

Therefore, SkyWest has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Airlines industry average of 6.6%.

View our latest analysis for SkyWest

In the above chart we have measured SkyWest'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 SkyWest here for free.

How Are Returns Trending?

When we looked at the ROCE trend at SkyWest, we didn't gain much confidence. Around five years ago the returns on capital were 8.4%, but since then they've fallen to 2.0%. However it looks like SkyWest might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by SkyWest's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 51% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think SkyWest has the makings of a multi-bagger.

On a final note, we found 2 warning signs for SkyWest (1 is concerning) you should be aware of.

While SkyWest 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.