If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Adecoagro (NYSE:AGRO) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on Adecoagro is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.079 = US$203m ÷ (US$3.1b - US$495m) (Based on the trailing twelve months to March 2023).
Therefore, Adecoagro has an ROCE of 7.9%. On its own, that's a low figure but it's around the 9.7% average generated by the Food industry.
See our latest analysis for Adecoagro
In the above chart we have measured Adecoagro's 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 Adecoagro here for free.
What Does the ROCE Trend For Adecoagro Tell Us?
In terms of Adecoagro's historical ROCE trend, it doesn't exactly demand attention. The company has employed 99% more capital in the last five years, and the returns on that capital have remained stable at 7.9%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
Our Take On Adecoagro's ROCE
As we've seen above, Adecoagro's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 22% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
One final note, you should learn about the 4 warning signs we've spotted with Adecoagro (including 1 which is a bit unpleasant) .
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
About NYSE:AGRO
Adecoagro
An agro-industrial company, engages in various businesses in Argentina, Brazil, and Uruguay.
Undervalued with acceptable track record.
