These feedback metrics don’t make the AAR (NYSE: AIR) look too strong
What underlying fundamental trends may indicate that a business may be in decline? Declining businesses often have two underlying trends, on the one hand, a decline to return to on capital employed (ROCE) and a decrease based capital employed. Ultimately, this means that the company earns less per dollar invested and on top of that, it reduces its capital employed base. So after considering RAA (NYSE: AIR), the above trends didn’t look very good.
Understanding Return on Capital Employed (ROCE)
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on the AAR is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.047 = $ 57 million ÷ ($ 1.5 billion – $ 320 million) (Based on the last twelve months up to November 2021).
So, AAR has a ROCE of 4.7%. In absolute terms, that’s a low return, and it’s also below the aerospace and defense industry average of 9.4%.
See our latest analysis for the AAR
In the graph above, we measured AAR’s past ROCE against its past performance, but arguably the future is more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for the AAR.
What can we say about AAR’s ROCE trend?
In terms of AAR’s historic ROCE movements, the trend does not inspire confidence. To be more precise, the ROCE was 6.2% five years ago, but since then it has fallen noticeably. And on the capital employed front, the company is using roughly the same amount of capital as it was back in the day. Companies that exhibit these attributes tend not to shrink, but they can be mature and face pressure on their competitive margins. So, because these trends are generally not conducive to building a multi-bagger, we won’t hold our breath on the AAR becoming one if things continue as they did.
The basics on AAR’s ROCE
In summary, it is unfortunate that AAR generates lower returns from the same amount of capital. Investors should expect better things on the horizon, however, as the stock has risen 21% in the past five years. Either way, we’re not big fans of current trends so we think you might find better investments elsewhere.
If you would like to continue your research on AAR, you might be interested in knowing the 1 warning sign that our analysis uncovered.
While AAR does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.