Capital allocation trends at ANSYS (NASDAQ:ANSS) are less than ideal
To find a multi-bagger stock, what underlying trends should we look for in a company? In a perfect world, we would like to see a company invest more capital in their business and ideally the returns from that capital also increase. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. In light of this, when we looked ANSYS (NASDAQ:ANSS) and its ROCE trend, we weren’t exactly thrilled.
What is return on capital employed (ROCE)?
For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. Analysts use this formula to calculate it for ANSYS:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.10 = $550 million ÷ ($6.1 billion – $635 million) (Based on the last twelve months to March 2022).
So, ANSYS has a ROCE of 10%. This is a fairly standard return and is in line with the industry average of 9.7%.
See our latest analysis for ANSYS
Above, you can see how ANSYS’ current ROCE compares to its past returns on capital, but you can’t say anything about the past. If you want, you can check out forecasts from analysts covering ANSYS here for free.
What is the return trend?
When we looked at the ROCE trend at ANSYS, we didn’t gain much confidence. To be more specific, ROCE has fallen by 17% over the past five years. Although, given that revenue and the amount of assets used in the business have increased, it could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. If these investments prove successful, it can bode very well for long-term stock performance.
Our view on ANSYS ROCE
While returns have fallen for ANSYS lately, we are encouraged to see that sales are increasing and the company is reinvesting in its operations. And the stock has followed suit by returning a significant 90% to shareholders over the past five years. So while the underlying trends can already be explained by investors, we still think this stock deserves further investigation.
One more thing to note, we have identified 2 warning signs with ANSYS and understanding them should be part of your investment process.
For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.