There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at Animalcare Group (LON:ANCR) and its ROCE trend, we weren't exactly thrilled.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Animalcare Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = UK£4.7m ÷ (UK£126m - UK£17m) (Based on the trailing twelve months to June 2020).
Therefore, Animalcare Group has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 9.0%.
See our latest analysis for Animalcare Group
Above you can see how the current ROCE for Animalcare Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Animalcare Group.
So How Is Animalcare Group's ROCE Trending?
When we looked at the ROCE trend at Animalcare Group, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.3% from 5.4% five years ago. However it looks like Animalcare Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a side note, Animalcare Group has done well to pay down its current liabilities to 13% of total assets. Considering it used to be 66%, that's a huge drop in that ratio and it would explain the decline in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.In Conclusion...
In summary, Animalcare Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 33% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Animalcare Group has the makings of a multi-bagger.
Animalcare Group does have some risks though, and we've spotted 2 warning signs for Animalcare Group that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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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About AIM:ANCR
Animalcare Group
Develops, sells, and distributes licensed veterinary pharmaceuticals and identification products, and services for companion and production animals, and equine veterinary markets in Europe and internationally.
Flawless balance sheet with proven track record.
