Return Trends At Agro Tech Foods (NSE:ATFL) Aren't Appealing

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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Agro Tech Foods (NSE:ATFL) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 Agro Tech Foods, this is the formula:

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

0.095 = ₹437m ÷ (₹5.5b - ₹842m) (Based on the trailing twelve months to March 2021).

So, Agro Tech Foods has an ROCE of 9.5%. Ultimately, that's a low return and it under-performs the Food industry average of 13%.

View our latest analysis for Agro Tech Foods

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

There are better returns on capital out there than what we're seeing at Agro Tech Foods. Over the past five years, ROCE has remained relatively flat at around 9.5% and the business has deployed 29% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, Agro Tech Foods has done well to reduce current liabilities to 15% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Agro Tech Foods' ROCE

In summary, Agro Tech Foods has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 101% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you're still interested in Agro Tech Foods it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Agro Tech Foods 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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