Capital Allocation Trends At Tonkens Agrar (ETR:GTK) Aren't Ideal

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Tonkens Agrar (ETR:GTK), so let's see why.

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 Tonkens Agrar, this is the formula:

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

0.025 = €883k ÷ (€37m - €1.8m) (Based on the trailing twelve months to December 2022).

Therefore, Tonkens Agrar has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Food industry average of 9.9%.

Check out our latest analysis for Tonkens Agrar

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tonkens Agrar's ROCE against it's prior returns. If you'd like to look at how Tonkens Agrar has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Tonkens Agrar Tell Us?

There is reason to be cautious about Tonkens Agrar, given the returns are trending downwards. To be more specific, the ROCE was 4.7% 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Tonkens Agrar becoming one if things continue as they have.

Our Take On Tonkens Agrar's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 61% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we found 3 warning signs for Tonkens Agrar (1 shouldn't be ignored) you should be aware of.

While Tonkens Agrar 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.