What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Spring Airlines (SHSE:601021) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Spring Airlines:

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

0.069 = CN¥2.2b ÷ (CN¥46b - CN¥14b) (Based on the trailing twelve months to September 2023).

Thus, Spring Airlines has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Airlines industry average of 8.9%.

Above you can see how the current ROCE for Spring Airlines compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Spring Airlines .

What Does the ROCE Trend For Spring Airlines Tell Us?

The trend of ROCE doesn't look fantastic because it's fallen from 9.9% five years ago, while the business's capital employed increased by 61%. Usually this isn't ideal, but given Spring Airlines conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Spring Airlines probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Spring Airlines is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 36% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you want to continue researching Spring Airlines, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Spring Airlines 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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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.