What Do The Returns On Capital At ArborGen Holdings (NZSE:ARB) Tell Us?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 ArborGen Holdings (NZSE:ARB) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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).

Therefore, ArborGen Holdings has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Forestry industry average of 6.9%.

View 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.

How Are Returns Trending?

Over the past five years, ArborGen Holdings' ROCE has remained relatively flat while the business is using 29% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. In addition to that, since the ROCE doesn't scream "quality" at 2.0%, it's hard to get excited about these developments.

In Conclusion...

In summary, ArborGen Holdings isn't reinvesting funds back into the business and returns aren't growing. And investors appear hesitant that the trends will pick up because the stock has fallen 17% in the last five years. 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.

One more thing to note, we've identified 3 warning signs with ArborGen Holdings and understanding them should be part of your investment process.

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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