AgroGeneration (EPA:ALAGR) Is Very Good At Capital Allocation

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in AgroGeneration's (EPA:ALAGR) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for AgroGeneration:

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

0.36 = €14m ÷ (€58m - €19m) (Based on the trailing twelve months to June 2022).

So, AgroGeneration has an ROCE of 36%. That's a fantastic return and not only that, it outpaces the average of 5.6% earned by companies in a similar industry.

View our latest analysis for AgroGeneration

Historical performance is a great place to start when researching a stock so above you can see the gauge for AgroGeneration's ROCE against it's prior returns. If you're interested in investigating AgroGeneration's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is AgroGeneration's ROCE Trending?

We're pretty happy with how the ROCE has been trending at AgroGeneration. We found that the returns on capital employed over the last five years have risen by 158%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 44% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

One more thing to note, AgroGeneration has decreased current liabilities to 32% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On AgroGeneration's ROCE

In a nutshell, we're pleased to see that AgroGeneration has been able to generate higher returns from less capital. However the stock is down a substantial 86% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

If you'd like to know about the risks facing AgroGeneration, we've discovered 2 warning signs that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.