Stock Analysis

AGRANA Beteiligungs-Aktiengesellschaft's (VIE:AGR) Returns On Capital Not Reflecting Well On The Business

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To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, AGRANA Beteiligungs-Aktiengesellschaft (VIE:AGR) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for AGRANA Beteiligungs-Aktiengesellschaft, this is the formula:

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

0.078 = €130m ÷ (€3.0b - €1.3b) (Based on the trailing twelve months to November 2022).

Therefore, AGRANA Beteiligungs-Aktiengesellschaft has an ROCE of 7.8%. On its own, that's a low figure but it's around the 8.6% average generated by the Food industry.

View our latest analysis for AGRANA Beteiligungs-Aktiengesellschaft

WBAG:AGR Return on Capital Employed March 15th 2023

In the above chart we have measured AGRANA Beteiligungs-Aktiengesellschaft'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 Can We Tell From AGRANA Beteiligungs-Aktiengesellschaft's ROCE Trend?

We are a bit worried about the trend of returns on capital at AGRANA Beteiligungs-Aktiengesellschaft. To be more specific, the ROCE was 10% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect AGRANA Beteiligungs-Aktiengesellschaft to turn into a multi-bagger.

On a side note, AGRANA Beteiligungs-Aktiengesellschaft's current liabilities have increased over the last five years to 43% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Key Takeaway

In summary, it's unfortunate that AGRANA Beteiligungs-Aktiengesellschaft is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 18% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing to note, we've identified 2 warning signs with AGRANA Beteiligungs-Aktiengesellschaft and understanding them should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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