There's Been No Shortage Of Growth Recently For Air Arabia PJSC's (DFM:AIRARABIA) Returns On Capital

Simply Wall St · 05/13 10:37

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Air Arabia PJSC (DFM:AIRARABIA) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Air Arabia PJSC:

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

0.12 = د.إ1.2b ÷ (د.إ15b - د.إ4.1b) (Based on the trailing twelve months to December 2023).

Thus, Air Arabia PJSC has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Airlines industry average of 8.4% it's much better.

View our latest analysis for Air Arabia PJSC

DFM:AIRARABIA Return on Capital Employed May 13th 2024

In the above chart we have measured Air Arabia PJSC's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Air Arabia PJSC .

So How Is Air Arabia PJSC's ROCE Trending?

Air Arabia PJSC has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 120% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

Our Take On Air Arabia PJSC's ROCE

In summary, we're delighted to see that Air Arabia PJSC has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 1 warning sign with Air Arabia PJSC and understanding this should be part of your investment process.

While Air Arabia PJSC 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.