What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, AgroFresh Solutions (NASDAQ:AGFS) we aren't filled with optimism, but let's investigate further.
Return On Capital Employed (ROCE): What is it?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on AgroFresh Solutions is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.017 = US$12m ÷ (US$767m - US$47m) (Based on the trailing twelve months to March 2021).
Therefore, AgroFresh Solutions has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 8.2%.
Check out our latest analysis for AgroFresh Solutions
In the above chart we have measured AgroFresh Solutions' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for AgroFresh Solutions.
How Are Returns Trending?
We aren't inspired by the trend, given ROCE has reduced by 37% over the last five years and AgroFresh Solutions is applying -28% less capital in the business, even after the capital raising they conducted (prior to their latest reported figures).
The Key Takeaway
In summary, it's unfortunate that AgroFresh Solutions is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 59% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
AgroFresh Solutions could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While AgroFresh Solutions may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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