Yahoo Finance Acadian Timber (TSE:ADN) Will Be Looking To Turn Around Its Returns
When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Acadian Timber (TSE:ADN), we weren't too upbeat about how things were going.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on Acadian Timber is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.039 = CA$19m ÷ (CA$513m - CA$15m) (Based on the trailing twelve months to March 2021).
Thus, Acadian Timber has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 18%.
See our latest analysis for Acadian Timber
Above you can see how the current ROCE for Acadian Timber 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 Acadian Timber here for free.
The Trend Of ROCE
We are a bit worried about the trend of returns on capital at Acadian Timber. To be more specific, the ROCE was 5.5% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Acadian Timber to turn into a multi-bagger.
Our Take On Acadian Timber's ROCE
In summary, it's unfortunate that Acadian Timber is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 63% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
Acadian Timber does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...
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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