Stock Analysis

Alaska Air Group (NYSE:ALK) Could Be Struggling To Allocate Capital

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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Alaska Air Group (NYSE:ALK) and its ROCE trend, we weren't exactly thrilled.

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 Alaska Air Group, this is the formula:

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

0.037 = US$356m ÷ (US$14b - US$4.5b) (Based on the trailing twelve months to December 2022).

So, Alaska Air Group has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Airlines industry average of 4.6%.

View our latest analysis for Alaska Air Group

NYSE:ALK Return on Capital Employed March 14th 2023

Above you can see how the current ROCE for Alaska Air Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Alaska Air Group here for free.

So How Is Alaska Air Group's ROCE Trending?

On the surface, the trend of ROCE at Alaska Air Group doesn't inspire confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 3.7%. 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.

What We Can Learn From Alaska Air Group'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 Alaska Air Group. However, despite the promising trends, the stock has fallen 29% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to continue researching Alaska Air Group, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Alaska Air Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Valuation is complex, but we're helping make it simple.

Find out whether Alaska Air Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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