If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for SkyWest, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.04 = US$249m ÷ (US$7.5b - US$1.2b) (Based on the trailing twelve months to September 2022).
Therefore, SkyWest has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Airlines industry average of 6.1%.
View our latest analysis for SkyWest
Above you can see how the current ROCE for SkyWest 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 report for SkyWest.
What Can We Tell From SkyWest's ROCE Trend?
On the surface, the trend of ROCE at SkyWest doesn't inspire confidence. Around five years ago the returns on capital were 7.8%, but since then they've fallen to 4.0%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for SkyWest. These growth trends haven't led to growth returns though, since the stock has fallen 68% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
SkyWest does have some risks though, and we've spotted 2 warning signs for SkyWest that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
About NasdaqGS:SKYW
SkyWest
Through its subsidiaries, engages in the operation of a regional airline in the United States.
Fair value with mediocre balance sheet.
