Australian Agricultural Projects (ASX:AAP) Is Looking To Continue Growing Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Australian Agricultural Projects (ASX:AAP) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Australian Agricultural Projects:

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

0.007 = AU$111k ÷ (AU$21m - AU$4.7m) (Based on the trailing twelve months to December 2023).

Thus, Australian Agricultural Projects has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Food industry average of 11%.

View our latest analysis for Australian Agricultural Projects

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Australian Agricultural Projects' past further, check out this free graph covering Australian Agricultural Projects' past earnings, revenue and cash flow.

How Are Returns Trending?

Australian Agricultural Projects has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.7% on its capital. And unsurprisingly, like most companies trying to break into the black, Australian Agricultural Projects is utilizing 81% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Our Take On Australian Agricultural Projects' ROCE

Overall, Australian Agricultural Projects gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has returned a solid 75% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Australian Agricultural Projects can keep these trends up, it could have a bright future ahead.

If you want to know some of the risks facing Australian Agricultural Projects we've found 6 warning signs (2 are potentially serious!) that you should be aware of before investing here.

While Australian Agricultural Projects 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.

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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.