There Are Reasons To Feel Uneasy About SkyWest's (NASDAQ:SKYW) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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)

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. The formula for this calculation on SkyWest is:

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

0.017 = US$102m ÷ (US$7.1b - US$1.1b) (Based on the trailing twelve months to March 2022).

Thus, SkyWest has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Airlines industry average of 3.0%.

See 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For SkyWest Tell Us?

When we looked at the ROCE trend at SkyWest, we didn't gain much confidence. Around five years ago the returns on capital were 7.0%, but since then they've fallen to 1.7%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On SkyWest's ROCE

While returns have fallen for SkyWest in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 27% in 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.

On a final note, we found 3 warning signs for SkyWest (1 makes us a bit uncomfortable) you should be aware of.

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.