If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Tonkens Agrar (ETR:GTK), so let's see why.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Tonkens Agrar is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.025 = €883k ÷ (€37m - €1.8m) (Based on the trailing twelve months to December 2022).

Therefore, Tonkens Agrar has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.9%.

See our latest analysis for Tonkens Agrar

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tonkens Agrar's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Tonkens Agrar, check out these free graphs here.

So How Is Tonkens Agrar's ROCE Trending?

In terms of Tonkens Agrar's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 4.7% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Tonkens Agrar to turn into a multi-bagger.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 57% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Tonkens Agrar (of which 1 can't be ignored!) that you should know about.