What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Australian Agricultural Projects (ASX:AAP) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Australian Agricultural Projects:

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

0.0048 = AU$74k ÷ (AU$19m - AU$3.6m) (Based on the trailing twelve months to December 2022).

So, Australian Agricultural Projects has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Food industry average of 2.9%.

Check out our latest analysis for Australian Agricultural Projects

Historical performance is a great place to start when researching a stock so above you can see the gauge for Australian Agricultural Projects' ROCE against it's prior returns. If you're interested in investigating Australian Agricultural Projects' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Australian Agricultural Projects Tell Us?

On the surface, the trend of ROCE at Australian Agricultural Projects doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.5% from 3.7% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Australian Agricultural Projects have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 44% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 6 warning signs for Australian Agricultural Projects (of which 3 make us uncomfortable!) that you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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