Often when I am researching stocks to invest in, I may make my list smaller by picking a few companies in the same industry and define what I would liken to investing intelligence. "Investing intelligence" is important because it provides a good idea of how profitable a company is. I want to know how smart management is at using their money and assets to make more money. I have picked three of the largest airlines in the "Major Airline Industry" to see which company appears to be the wisest in how they use money to make money. There are three different ratios we are going to look at: Return on Equity; Return on Assets; and Return on Capital.
Return on Equity
- Delta Air Lines (DAL) - 243.27%
- United Continental Holdings (UAL) - (11.65%)
- US Airways Group (LCC) - 134.42%
- Industry - 85.45%
How savvy a company is at making money with what they have now is important to me. How well do these companies generate income from the money shareholders give them? In other words, if I give the company a dollar, what can I expect the return on that dollar to be? This is known as Return on Equity. ROI analysis compares the magnitude and timing of investment gains directly with the magnitude and timing of investment costs. A high ROI means that investment gains compare favorably to investment costs.
I would have to give the edge to Delta that has very good returns over the last year. US Airways did very well also, but the edge must go to Delta Air Lines here.
Return on Assets
- Delta Air Lines - 3.3%
- United Continental Holdings - (.6%)
- US Airways Group - 7%
- Industry - (36%)
Now I want to know how well the airlines do generating revenue with the assets they have now. This is known as Return on Assets and is one of the handful of really important metrics every investor should know. Return on Assets (ROA) tells you how efficiently (or inefficiently) a company turns assets into net income. It is a way to tell at a glance how profitable a company is. Consider that companies take capital from investors and turn it into profits, which are in turn returned to the investor in one form or another. ROA measures how efficiently the company does this.
This industry as a whole has not done very well at all with a -36% return over the last year. Of the three I am looking at, only United Continental came up negative here while I must give the edge to US Airways since it has almost doubled its return coming in at 7% compared to Delta's 3.3%.
Return on Capital
- Delta Airlines - 4.6%
- United Continental Holdings - (.9%)
- US Airways Group - 11.3%
- Industry - 4.9%
The last question I may ask these three companies is this: When you invest money back into your company (whether borrowed or owned), how much money do you make for every dollar you invest? This is called Return on Capital and it complements the Return on Equity (ROE) ratio by adding a company's debt liabilities, or funded debt, to equity to reflect a company's total capital employed. By comparing net income to the sum of a company's debt and equity capital, investors can get a clear picture of how the use of leverage impacts a company's profitability.
United Continental is still in the red on this one while the industry average is 4.9%. Only US Airways does an outstanding job by coming in more than double the industry average at 11.3%.
Looking at these three ratios, I would have to pick US Airways as the airline of choice that I would do more research on. Management for the company appears to do the best reinvesting of the resources they have. I would stay away from United Continental Holdings in the short term, it would not be my choice of airline to do further research right now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.