Returns On Capital Signal Difficult Times Ahead For Nufarm (ASX:NUF)

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. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Nufarm (ASX:NUF), so let's see why.

Understanding 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. The formula for this calculation on Nufarm is:

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

0.025 = AU$99m ÷ (AU$5.2b - AU$1.2b) (Based on the trailing twelve months to March 2024).

Thus, Nufarm has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.4%.

Check out our latest analysis for Nufarm

In the above chart we have measured Nufarm'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 analyst report for Nufarm .

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Nufarm. To be more specific, the ROCE was 3.6% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Nufarm becoming one if things continue as they have.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 25% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Like most companies, Nufarm does come with some risks, and we've found 1 warning sign that you should be aware of.

While Nufarm 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. 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.