Returns On Capital At Alaska Air Group (NYSE:ALK) Paint A Concerning Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.069 = US$682m ÷ (US$15b - US$4.7b) (Based on the trailing twelve months to September 2022).

Therefore, Alaska Air Group has an ROCE of 6.9%. On its own, that's a low figure but it's around the 6.1% average generated by the Airlines industry.

Our analysis indicates that ALK is potentially overvalued!

In the above chart we have measured Alaska Air Group's 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 Alaska Air Group here for free.

What Can We Tell From Alaska Air Group's ROCE Trend?

On the surface, the trend of ROCE at Alaska Air Group doesn't inspire confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 6.9%. 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

In summary, despite lower returns in the short term, we're encouraged to see that Alaska Air Group is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 34% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 1 warning sign for Alaska Air Group that we think you should be aware of.

While Alaska Air Group 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.