In This Article:
Today we'll look at Wizz Air Holdings Plc (LON:WIZZ) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Wizz Air Holdings:
0.17 = €293m ÷ (€2.6b - €847m) (Based on the trailing twelve months to June 2019.)
So, Wizz Air Holdings has an ROCE of 17%.
See our latest analysis for Wizz Air Holdings
Does Wizz Air Holdings Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Wizz Air Holdings's ROCE appears to be substantially greater than the 14% average in the Airlines industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Wizz Air Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that , Wizz Air Holdings currently has an ROCE of 17%, less than the 29% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Wizz Air Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Wizz Air Holdings.