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Be Wary Of Ainsworth Game Technology (ASX:AGI) And Its Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Ainsworth Game Technology (ASX:AGI), we weren't too hopeful.

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 Ainsworth Game Technology, this is the formula:

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

0.033 = AU$11m ÷ (AU$426m - AU$93m) (Based on the trailing twelve months to December 2022).

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Thus, Ainsworth Game Technology has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.5%.

Check out our latest analysis for Ainsworth Game Technology

roce
ASX:AGI Return on Capital Employed January 19th 2024

In the above chart we have measured Ainsworth Game Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Ainsworth Game Technology.

So How Is Ainsworth Game Technology's ROCE Trending?

The trend of ROCE at Ainsworth Game Technology is showing some signs of weakness. To be more specific, today's ROCE was 13% five years ago but has since fallen to 3.3%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 21% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Ainsworth Game Technology's current liabilities have increased over the last five years to 22% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 3.3%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Key Takeaway

In summary, it's unfortunate that Ainsworth Game Technology is shrinking its capital base and also generating lower returns. However the stock has delivered a 79% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 2 warning signs for Ainsworth Game Technology you'll probably want to know about.

While Ainsworth Game Technology may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.