Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at AgroFresh Solutions (NASDAQ:AGFS), so let's see why.
What is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for AgroFresh Solutions:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.032 = US$24m ÷ (US$778m - US$51m) (Based on the trailing twelve months to September 2020).
Thus, AgroFresh Solutions has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 8.1%.
See our latest analysis for AgroFresh Solutions
Above you can see how the current ROCE for AgroFresh Solutions compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for AgroFresh Solutions.
So How Is AgroFresh Solutions' ROCE Trending?
We aren't inspired by the trend, given ROCE has reduced by 47% over the last five years and AgroFresh Solutions is applying -30% less capital in the business, even after the capital raising they conducted (prior to their latest reported figures).
What We Can Learn From AgroFresh Solutions' ROCE
To see AgroFresh Solutions reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors haven't taken kindly to these developments, since the stock has declined 64% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Like most companies, AgroFresh Solutions does come with some risks, and we've found 2 warning signs that you should be aware of.
While AgroFresh Solutions isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.