Is This A Sign of Things To Come At Anglo-Eastern Plantations (LON:AEP)?

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Anglo-Eastern Plantations (LON:AEP), the trends above didn't look too great.

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. Analysts use this formula to calculate it for Anglo-Eastern Plantations:

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

0.048 = US$25m ÷ (US$546m - US$25m) (Based on the trailing twelve months to June 2020).

Thus, Anglo-Eastern Plantations has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Food industry average of 7.7%.

View our latest analysis for Anglo-Eastern Plantations

Historical performance is a great place to start when researching a stock so above you can see the gauge for Anglo-Eastern Plantations' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Anglo-Eastern Plantations, check out these free graphs here.

How Are Returns Trending?

There is reason to be cautious about Anglo-Eastern Plantations, given the returns are trending downwards. To be more specific, the ROCE was 11% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Anglo-Eastern Plantations becoming one if things continue as they have.

What We Can Learn From Anglo-Eastern Plantations' ROCE

In summary, it's unfortunate that Anglo-Eastern Plantations is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 9.5% 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.

One more thing, we've spotted 1 warning sign facing Anglo-Eastern Plantations that you might find interesting.

While Anglo-Eastern Plantations 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. 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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