Return Trends At AgroFresh Solutions (NASDAQ:AGFS) Aren't Appealing

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Although, when we looked at AgroFresh Solutions (NASDAQ:AGFS), it didn't seem to tick all of these boxes.

Understanding 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. Analysts use this formula to calculate it for AgroFresh Solutions:

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

0.023 = US$15m ÷ (US$697m - US$45m) (Based on the trailing twelve months to June 2022).

Therefore, AgroFresh Solutions has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 12%.

See our latest analysis for AgroFresh Solutions

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 Does the ROCE Trend For AgroFresh Solutions Tell Us?

Over the past five years, AgroFresh Solutions' ROCE has remained relatively flat while the business is using 25% 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. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

Our Take On AgroFresh Solutions' ROCE

In summary, AgroFresh Solutions isn't reinvesting funds back into the business and returns aren't growing. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 79% over the last five years. Therefore based on the analysis done in this article, we don't think AgroFresh Solutions has the makings of a multi-bagger.

On a final note, we've found 2 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.

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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.