Stock Analysis

AgroFresh Solutions' (NASDAQ:AGFS) Returns On Capital Not Reflecting Well On The Business

  •  Updated
Source: Shutterstock

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. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at AgroFresh Solutions (NASDAQ:AGFS), we've spotted some signs that it could be struggling, so let's investigate.

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

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 AgroFresh Solutions is:

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

0.02 = US$14m ÷ (US$729m - US$50m) (Based on the trailing twelve months to March 2022).

Therefore, AgroFresh Solutions has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 12%.

View our latest analysis for AgroFresh Solutions

NasdaqGS:AGFS Return on Capital Employed June 18th 2022

Above you can see how the current ROCE for AgroFresh Solutions compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for AgroFresh Solutions.

What The Trend Of ROCE Can Tell Us

The trend of ROCE at AgroFresh Solutions is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 2.0% we see today. On top of that, the business is utilizing 22% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

Our Take On AgroFresh Solutions' ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. This could explain why the stock has sunk a total of 78% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we've found 3 warning signs for AgroFresh Solutions that we think you should be aware of.

While AgroFresh Solutions isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Valuation is complex, but we're helping make it simple.

Find out whether AgroFresh Solutions is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis