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. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Delta Air Lines (NYSE:DAL), we don't think it's current trends fit the mold of a multi-bagger.
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. The formula for this calculation on Delta Air Lines is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.035 = US$1.7b ÷ (US$75b - US$26b) (Based on the trailing twelve months to June 2022).
Thus, Delta Air Lines has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Airlines industry average of 4.8%.
In the above chart we have measured Delta Air Lines' 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 Can We Tell From Delta Air Lines' ROCE Trend?
On the surface, the trend of ROCE at Delta Air Lines doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 3.5%. 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.
The Bottom Line On Delta Air Lines' 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 Delta Air Lines. And there could be an opportunity here if other metrics look good too, because the stock has declined 32% 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.
Delta Air Lines does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
While Delta Air Lines 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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Find out whether Delta Air Lines 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.View the Free Analysis
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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.
Delta Air Lines
Delta Air Lines, Inc. provides scheduled air transportation for passengers and cargo in the United States and internationally.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
|Analysis Area||Score (0-6)|
Read more about these checks in the individual report sections or in our analysis model.
Good value with reasonable growth potential.