United Airlines Holdings (NASDAQ:UAL) May Have Issues Allocating Its 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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at United Airlines Holdings (NASDAQ:UAL), it didn't seem to tick all of these boxes.

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. The formula for this calculation on United Airlines Holdings is:

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

0.084 = US$3.9b ÷ (US$70b - US$24b) (Based on the trailing twelve months to March 2023).

Thus, United Airlines Holdings has an ROCE of 8.4%. On its own, that's a low figure but it's around the 7.4% average generated by the Airlines industry.

Check out our latest analysis for United Airlines Holdings

In the above chart we have measured United Airlines Holdings' 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 United Airlines Holdings here for free.

What Does the ROCE Trend For United Airlines Holdings Tell Us?

In terms of United Airlines Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.4% from 13% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On United Airlines Holdings' ROCE

While returns have fallen for United Airlines Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 25% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, United Airlines Holdings does come with some risks, and we've found 1 warning sign that you should be aware of.

While United Airlines Holdings 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.