The Trends At Allegiant Travel (NASDAQ:ALGT) That You Should Know About

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Allegiant Travel (NASDAQ:ALGT), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Allegiant Travel is:

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

0.074 = US$179m ÷ (US$3.3b - US$859m) (Based on the trailing twelve months to June 2020).

Thus, Allegiant Travel has an ROCE of 7.4%. On its own that's a low return, but compared to the average of 5.8% generated by the Airlines industry, it's much better.

See 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 report on analyst forecasts for the company.

How Are Returns Trending?

When we looked at the ROCE trend at Allegiant Travel, we didn't gain much confidence. To be more specific, ROCE has fallen from 32% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Allegiant Travel's ROCE

We're a bit apprehensive about Allegiant Travel because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 36% over the last five years, so it looks like investors are recognizing these changes. Unless these trends revert to a more positive trajectory, we would look elsewhere.

If you want to know some of the risks facing Allegiant Travel we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While Allegiant Travel 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.

This article by Simply Wall St is general in nature. 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.

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