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Why You Should Like ANSYS, Inc.’s (NASDAQ:ANSS) ROCE

Simply Wall St

Today we are going to look at ANSYS, Inc. (NASDAQ:ANSS) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we'll go over how we calculate ROCE. 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 measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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 ANSYS:

0.17 = US$502m ÷ (US$3.5b - US$506m) (Based on the trailing twelve months to June 2019.)

Therefore, ANSYS has an ROCE of 17%.

See our latest analysis for ANSYS

Is ANSYS's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, ANSYS's ROCE is meaningfully higher than the 9.9% average in the Software industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from ANSYS's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

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

NasdaqGS:ANSS Past Revenue and Net Income, August 26th 2019

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. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for ANSYS.

What Are Current Liabilities, And How Do They Affect ANSYS's ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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.

ANSYS has total assets of US$3.5b and current liabilities of US$506m. As a result, its current liabilities are equal to approximately 14% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

The Bottom Line On ANSYS's ROCE

Overall, ANSYS has a decent ROCE and could be worthy of further research. ANSYS looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.