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Do Alico, Inc.’s (NASDAQ:ALCO) Returns On Capital Employed Make The Cut?

Simply Wall St

Today we are going to look at Alico, Inc. (NASDAQ:ALCO) 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. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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 Alico:

0.095 = US$36m ÷ (US$400m - US$23m) (Based on the trailing twelve months to June 2019.)

Therefore, Alico has an ROCE of 9.5%.

View our latest analysis for Alico

Is Alico's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. We can see Alico's ROCE is around the 8.7% average reported by the Food industry. Aside from the industry comparison, Alico's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

In our analysis, Alico's ROCE appears to be 9.5%, compared to 3 years ago, when its ROCE was 5.0%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Alico's ROCE compares to its industry. Click to see more on past growth.

NasdaqGS:ALCO Past Revenue and Net Income, November 12th 2019

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. You can check if Alico has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Alico's Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Alico has total assets of US$400m and current liabilities of US$23m. Therefore its current liabilities are equivalent to approximately 5.8% of its total assets. Alico has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.

Our Take On Alico's ROCE

Based on this information, Alico appears to be a mediocre business. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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

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.

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. Thank you for reading.