Today we’ll look at Air T, Inc. (NASDAQ:AIRT) and reflect on its potential as an investment. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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’.

So, How Do We Calculate ROCE?

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 Air T:

0.034 = US$4.2m ÷ (US$118m – US$44m) (Based on the trailing twelve months to September 2018.)

So, Air T has an ROCE of 3.4%.

Check out our latest analysis for Air T

Does Air T Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Air T’s ROCE appears meaningfully below the 9.3% average reported by the Logistics industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Air T’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.

Air T’s current ROCE of 3.4% is lower than its ROCE in the past, which was 14%, 3 years ago. This makes us wonder if the business is facing new challenges.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. If Air T is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Do Air T’s Current Liabilities Skew Its ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.