These Return Metrics Don't Make American Vanguard (NYSE:AVD) Look Too Strong

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at American Vanguard (NYSE:AVD), so let's see why.

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. Analysts use this formula to calculate it for American Vanguard:

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

0.037 = US$22m ÷ (US$807m - US$215m) (Based on the trailing twelve months to June 2024).

Thus, American Vanguard has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 8.9%.

See our latest analysis for American Vanguard

Above you can see how the current ROCE for American Vanguard compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering American Vanguard for free.

What Can We Tell From American Vanguard's ROCE Trend?

There is reason to be cautious about American Vanguard, given the returns are trending downwards. About five years ago, returns on capital were 6.1%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect American Vanguard to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that American Vanguard is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 64% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

American Vanguard does have some risks, we noticed 4 warning signs (and 2 which can't be ignored) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.