AGF (CPH:AGF B) Is Looking To Continue Growing Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in AGF's (CPH:AGF B) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for AGF, this is the formula:

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

0.049 = kr.5.7m ÷ (kr.198m - kr.80m) (Based on the trailing twelve months to December 2021).

So, AGF has an ROCE of 4.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.4%.

View our latest analysis for AGF

Historical performance is a great place to start when researching a stock so above you can see the gauge for AGF's ROCE against it's prior returns. If you'd like to look at how AGF 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 AGF's ROCE Trend?

AGF has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 4.9% which is a sight for sore eyes. Not only that, but the company is utilizing 253% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 40%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that AGF has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

What We Can Learn From AGF's ROCE

To the delight of most shareholders, AGF has now broken into profitability. Since the stock has returned a staggering 151% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if AGF can keep these trends up, it could have a bright future ahead.

AGF does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.