Returns On Capital At Indofood Agri Resources (SGX:5JS) Paint A Concerning Picture

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Indofood Agri Resources (SGX:5JS), the trends above didn't look too great.

What is 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. To calculate this metric for Indofood Agri Resources, this is the formula:

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

0.038 = Rp1.0t ÷ (Rp37t - Rp9.9t) (Based on the trailing twelve months to June 2020).

So, Indofood Agri Resources has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Food industry average of 10%.

Check out our latest analysis for Indofood Agri Resources

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

So How Is Indofood Agri Resources' ROCE Trending?

In terms of Indofood Agri Resources' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 6.0%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Indofood Agri Resources to turn into a multi-bagger.

Our Take On Indofood Agri Resources' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 27% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to continue researching Indofood Agri Resources, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Indofood Agri Resources 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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