Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Agria Group Holding AD (BUL:AGH) and its ROCE trend, we weren't exactly thrilled.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Agria Group Holding AD:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.069 = лв15m ÷ (лв376m - лв160m) (Based on the trailing twelve months to March 2021).
Therefore, Agria Group Holding AD has an ROCE of 6.9%. In absolute terms, that's a low return but it's around the Industrials industry average of 5.8%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Agria Group Holding AD's ROCE against it's prior returns. If you'd like to look at how Agria Group Holding AD has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Agria Group Holding AD's ROCE Trend?
On the surface, the trend of ROCE at Agria Group Holding AD doesn't inspire confidence. To be more specific, ROCE has fallen from 14% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a separate but related note, it's important to know that Agria Group Holding AD has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
What We Can Learn From Agria Group Holding AD's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Agria Group Holding AD is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 22% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Agria Group Holding AD (of which 1 makes us a bit uncomfortable!) that you should know about.
While Agria Group Holding AD 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.
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