AgroFresh Solutions (NASDAQ:AGFS) Will Be Hoping To Turn Its Returns On Capital Around
Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within AgroFresh Solutions (NASDAQ:AGFS), we weren't too hopeful.
What is 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. Analysts use this formula to calculate it for AgroFresh Solutions:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = US$14m ÷ (US$729m - US$50m) (Based on the trailing twelve months to March 2022).
Thus, AgroFresh Solutions has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 12%.
Check out 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?
In terms of AgroFresh Solutions' historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 2.9% five years ago but has since fallen to 2.0%. In addition to that, AgroFresh Solutions is now employing 22% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
The Key Takeaway
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Unsurprisingly then, the stock has dived 75% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
On a separate note, we've found 2 warning signs for AgroFresh Solutions you'll probably want to know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.