Returns At ArborGen Holdings (NZSE:ARB) Appear To Be Weighed Down
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at ArborGen Holdings (NZSE:ARB) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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 ArborGen Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = US$3.8m ÷ (US$208m - US$20m) (Based on the trailing twelve months to September 2020).
Thus, ArborGen Holdings has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 7.6%.
Check out our latest analysis for ArborGen Holdings
Above you can see how the current ROCE for ArborGen Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From ArborGen Holdings' ROCE Trend?
Over the past five years, ArborGen Holdings' ROCE has remained relatively flat while the business is using 29% less capital than before. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.
The Bottom Line On ArborGen Holdings' ROCE
In summary, ArborGen Holdings isn't reinvesting funds back into the business and returns aren't growing. And investors appear hesitant that the trends will pick up because the stock has fallen 30% in the last five years. Therefore based on the analysis done in this article, we don't think ArborGen Holdings has the makings of a multi-bagger.
Like most companies, ArborGen Holdings does come with some risks, and we've found 2 warning signs that you should be aware of.
While ArborGen Holdings 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
