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Are Anpario plc’s (LON:ANP) High Returns Really That Great?

Today we are going to look at Anpario plc (LON:ANP) to see whether it might be an attractive investment prospect. 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.

Firstly, 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 measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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'.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Anpario:

0.12 = UK£4.4m ÷ (UK£39m - UK£2.9m) (Based on the trailing twelve months to June 2019.)

So, Anpario has an ROCE of 12%.

View our latest analysis for Anpario

Does Anpario Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Anpario's ROCE appears to be substantially greater than the 9.6% average in the Food industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where Anpario sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

You can see in the image below how Anpario's ROCE compares to its industry. Click to see more on past growth.

AIM:ANP Past Revenue and Net Income, January 2nd 2020
AIM:ANP Past Revenue and Net Income, January 2nd 2020

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Anpario.

Anpario's Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Anpario has total liabilities of UK£2.9m and total assets of UK£39m. As a result, its current liabilities are equal to approximately 7.3% of its total assets. In addition to low current liabilities (making a negligible impact on ROCE), Anpario earns a sound return on capital employed.

The Bottom Line On Anpario's ROCE

This is good to see, and while better prospects may exist, Anpario seems worth researching further. There might be better investments than Anpario out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.