What are the early trends to look for to identify a stock that could multiply in value over the long term? Among other things, we will want to see two things; first, growth come back on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. Therefore, when we looked at ROCE trends at Agroton (WSE:AGT), we liked what we saw.
What is return on capital employed (ROCE)?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for Agroton:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.22 = $25 million ÷ ($122 million – $9.3 million) (Based on the last twelve months to June 2021).
So, Agroton has a ROCE of 22%. In absolute terms, this is an excellent return and is even better than the food industry average of 12%.
See our latest analysis for Agroton
Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to investigate more about Agroton’s past, check out this free chart of past profits, revenue and cash flow.
What does Agroton’s ROCE trend tell us?
It’s hard not to be impressed with Agroton’s returns on capital. The company has consistently gained 22% over the past five years and the capital employed within the company has increased by 53% over this period. With such high returns, it’s great that the company can continually reinvest its money at such attractive rates of return. If Agroton can continue like this, we would be very optimistic about its future.
The Key Takeaway
In summary, we are pleased to see that Agroton has accumulated returns by reinvesting at consistently high rates of return, as these are common characteristics of a multi-bagger. Still, over the past five years, the stock is down 27%, so the drop could provide an opening. For this reason, savvy investors may want to dig into this company in case it is a top investment.
One last note, you should inquire about the 5 warning signs we spotted with Agroton (including 1 which is a bit of a concern).
Agroton is not the only stock to generate high returns. If you want to see more, check out our free list of companies with high returns on equity with strong fundamentals.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.