In This Article:
Today we'll look at Apiam Animal Health Limited (ASX:AHX) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, 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 measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Apiam Animal Health:
0.074 = AU$6.3m ÷ (AU$107m - AU$22m) (Based on the trailing twelve months to December 2018.)
So, Apiam Animal Health has an ROCE of 7.4%.
View our latest analysis for Apiam Animal Health
Is Apiam Animal Health's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Apiam Animal Health's ROCE is meaningfully below the Healthcare industry average of 9.4%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, Apiam Animal Health's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
Our data shows that Apiam Animal Health currently has an ROCE of 7.4%, compared to its ROCE of 4.6% 3 years ago. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Apiam Animal Health's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during 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 Apiam Animal Health.