Our Take On The Returns On Capital At Agthia Group PJSC (ADX:AGTHIA)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Agthia Group PJSC (ADX:AGTHIA), we don't think it's current trends fit the mold of a multi-bagger.

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 Agthia Group PJSC:

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

0.052 = د.إ124m ÷ (د.إ3.3b - د.إ945m) (Based on the trailing twelve months to March 2020).

Thus, Agthia Group PJSC has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.2%.

See our latest analysis for Agthia Group PJSC

In the above chart we have a measured Agthia Group PJSC's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Agthia Group PJSC doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 5.2%. However it looks like Agthia Group PJSC might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in recent times. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Agthia Group PJSC's ROCE

In summary, Agthia Group PJSC is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 54% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a final note, we've found 1 warning sign for Agthia Group PJSC that we think you should be aware of.

While Agthia Group PJSC isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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