Today we are going to look at Angel Seafood Holdings Limited (ASX:AS1) 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

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 Angel Seafood Holdings:

0.0088 = AU$155k ÷ (AU$20m - AU$2.5m) (Based on the trailing twelve months to December 2019.)

Therefore, Angel Seafood Holdings has an ROCE of 0.9%.

See our latest analysis for Angel Seafood Holdings

Is Angel Seafood Holdings's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, Angel Seafood Holdings's ROCE appears to be significantly below the 6.9% average in the Food industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Angel Seafood Holdings compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.1% available in government bonds. Readers may wish to look for more rewarding investments.

You can click on the image below to see (in greater detail) how Angel Seafood Holdings's past growth compares to other companies.

It is important to remember that ROCE shows past performance, and is 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. If Angel Seafood Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Do Angel Seafood Holdings's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Angel Seafood Holdings has total assets of AU$20m and current liabilities of AU$2.5m. As a result, its current liabilities are equal to approximately 13% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

What We Can Learn From Angel Seafood Holdings's ROCE

While that is good to see, Angel Seafood Holdings has a low ROCE and does not look attractive in this analysis. You might be able to find a better investment than Angel Seafood Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.