ArborGen Holdings (NZSE:ARB) Hasn't Managed To Accelerate Its Returns

There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think ArborGen Holdings (NZSE:ARB) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on ArborGen Holdings is:

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

0.02 = US$3.8m ÷ (US$208m - US$20m) (Based on the trailing twelve months to September 2020).

Thus, ArborGen Holdings has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 7.5%.

See our latest analysis for ArborGen Holdings

In the above chart we have measured ArborGen Holdings' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering ArborGen Holdings here for free.

What Does the ROCE Trend For ArborGen Holdings Tell Us?

Over the past five years, ArborGen Holdings' ROCE has remained relatively flat while the business is using 29% less capital than before. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. In addition to that, since the ROCE doesn't scream "quality" at 2.0%, it's hard to get excited about these developments.

The Bottom Line On ArborGen Holdings' ROCE

In summary, ArborGen Holdings isn't reinvesting funds back into the business and returns aren't growing. Since the stock has declined 29% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

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

While ArborGen Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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