What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Allegiant Travel (NASDAQ:ALGT), we don't think it's current trends fit the mold of a multi-bagger.
We've discovered 1 warning sign about Allegiant Travel. View them for free.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. To calculate this metric for Allegiant Travel, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = US$93m ÷ (US$4.4b - US$1.3b) (Based on the trailing twelve months to December 2024).
Therefore, Allegiant Travel has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Airlines industry average of 8.6%.
Check out our latest analysis for Allegiant Travel
In the above chart we have measured Allegiant Travel'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 analyst report for Allegiant Travel .
So How Is Allegiant Travel's ROCE Trending?
On the surface, the trend of ROCE at Allegiant Travel doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.0% from 15% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
What We Can Learn From Allegiant Travel's ROCE
To conclude, we've found that Allegiant Travel is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 37% in the last five years. Therefore based on the analysis done in this article, we don't think Allegiant Travel has the makings of a multi-bagger.
Like most companies, Allegiant Travel does come with some risks, and we've found 1 warning sign that 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.