Some Investors May Be Worried About SkyWest's (NASDAQ:SKYW) 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? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at SkyWest (NASDAQ:SKYW) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for SkyWest, this is the formula:

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

0.031 = US$190m ÷ (US$7.3b - US$1.2b) (Based on the trailing twelve months to June 2022).

Therefore, SkyWest has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Airlines industry average of 4.8%.

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 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?

When we looked at the ROCE trend at SkyWest, we didn't gain much confidence. To be more specific, ROCE has fallen from 7.2% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On SkyWest'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 SkyWest. These growth trends haven't led to growth returns though, since the stock has fallen 45% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 2 warning signs with SkyWest (at least 1 which is significant) , and understanding these would certainly be useful.

While SkyWest 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.