We Like These Underlying Return On Capital Trends At Animalcare Group (LON:ANCR)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Animalcare Group (LON:ANCR) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Animalcare Group, this is the formula:

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

0.025 = UK£2.7m ÷ (UK£124m - UK£19m) (Based on the trailing twelve months to December 2020).

Thus, Animalcare Group has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 7.1%.

Check out our latest analysis for Animalcare Group

In the above chart we have measured Animalcare Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

Animalcare Group has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 2.5% on its capital. In addition to that, Animalcare Group is employing 499% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Animalcare Group has decreased current liabilities to 16% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Animalcare Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Animalcare Group's ROCE

To the delight of most shareholders, Animalcare Group has now broken into profitability. And a remarkable 106% total return over the last three years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Animalcare Group does have some risks though, and we've spotted 2 warning signs for Animalcare Group that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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