What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Angel Seafood Holdings (ASX:AS1) and its trend of ROCE, we really liked what we saw.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Angel Seafood Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0052 = AU$91k ÷ (AU$20m - AU$2.5m) (Based on the trailing twelve months to December 2019).
Therefore, Angel Seafood Holdings has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Food industry average of 4.7%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Angel Seafood Holdings' ROCE against it's prior returns. If you'd like to look at how Angel Seafood Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Angel Seafood Holdings Tell Us?
The fact that Angel Seafood Holdings is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses two years ago, but now it's earning 0.5% which is a sight for sore eyes. In addition to that, Angel Seafood Holdings is employing 306% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 13%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
The Bottom Line
Long story short, we're delighted to see that Angel Seafood Holdings' reinvestment activities have paid off and the company is now profitable. Given the stock has declined 43% in the last year, there could be a chance of a good investment here if the valuation makes sense. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
If you want to continue researching Angel Seafood Holdings, you might be interested to know about the 4 warning signs that our analysis has discovered.
While Angel Seafood Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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