There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. In light of that, when we looked at American Vanguard (NYSE:AVD) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for American Vanguard, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.037 = US$20m ÷ (US$710m - US$167m) (Based on the trailing twelve months to March 2021).
Thus, American Vanguard has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 9.0%.NYSE:AVD Return on Capital Employed August 1st 2021
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 here for free.
What Can We Tell From American Vanguard's ROCE Trend?
There are better returns on capital out there than what we're seeing at American Vanguard. The company has employed 48% more capital in the last five years, and the returns on that capital have remained stable at 3.7%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
What We Can Learn From American Vanguard's ROCE
Long story short, while American Vanguard has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think American Vanguard has the makings of a multi-bagger.
One more thing, we've spotted 3 warning signs facing American Vanguard that you might find interesting.
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.
This article by Simply Wall St is general in nature. 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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