Yahoo Finance Is Anglo-Eastern Plantations Plc (LON:AEP) Investing Your Capital Efficiently?
Today we are going to look at Anglo-Eastern Plantations Plc (LON:AEP) 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.
First up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Anglo-Eastern Plantations:
0.11 = US$65m ÷ (US$545m – US$39m) (Based on the trailing twelve months to June 2018.)
Therefore, Anglo-Eastern Plantations has an ROCE of 11%.
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Does Anglo-Eastern Plantations Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. It appears that Anglo-Eastern Plantations’s ROCE is fairly close to the Food industry average of 12%. Regardless of where Anglo-Eastern Plantations sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Anglo-Eastern Plantations has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Anglo-Eastern Plantations’s 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Anglo-Eastern Plantations has total liabilities of US$39m and total assets of US$545m. Therefore its current liabilities are equivalent to approximately 7.1% of its total assets. Low current liabilities have only a minimal impact on Anglo-Eastern Plantations’s ROCE, making its decent returns more credible.
The Bottom Line On Anglo-Eastern Plantations’s ROCE
If Anglo-Eastern Plantations can continue reinvesting in its business, it could be an attractive prospect. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
