Looking Into AAR's Return On Capital Employed

Pulled from Benzinga Pro data, AAR AIR posted Q1 earnings of $22.70 million, an increase from Q4 of 5.02%. Sales dropped to $446.30 million, a 6.26% decrease between quarters. In Q4, AAR earned $23.90 million, and total sales reached $476.10 million.

What Is ROCE?

Return on Capital Employed is a measure of yearly pre-tax profit relative to capital employed by a business. Changes in earnings and sales indicate shifts in a company's ROCE. A higher ROCE is generally representative of successful growth of a company and is a sign of higher earnings per share in the future. A low or negative ROCE suggests the opposite. In Q1, AAR posted an ROCE of 0.02%.

Keep in mind, while ROCE is a good measure of a company's recent performance, it is not a highly reliable predictor of a company's earnings or sales in the near future.

ROCE is a powerful metric for comparing the effectiveness of capital allocation for similar companies. A relatively high ROCE shows AAR is potentially operating at a higher level of efficiency than other companies in its industry. If the company is generating high profits with its current level of capital, some of that money can be reinvested in more capital which will generally lead to higher returns and, ultimately, earnings per share (EPS) growth.

For AAR, the positive return on capital employed ratio of 0.02% suggests that management is allocating their capital effectively. Effective capital allocation is a positive indicator that a company will achieve more durable success and favorable long-term returns.