Capital Allocation Trends At Ainsworth Game Technology (ASX:AGI) Aren't Ideal

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Ainsworth Game Technology (ASX:AGI) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

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 Ainsworth Game Technology is:

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

0.036 = AU$12m ÷ (AU$407m - AU$78m) (Based on the trailing twelve months to June 2022).

So, Ainsworth Game Technology has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 7.9%.

See our latest analysis for Ainsworth Game Technology

Above you can see how the current ROCE for Ainsworth Game Technology compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Ainsworth Game Technology's ROCE Trend?

The trend of returns that Ainsworth Game Technology is generating are raising some concerns. To be more specific, today's ROCE was 13% five years ago but has since fallen to 3.6%. In addition to that, Ainsworth Game Technology is now employing 21% less capital than it was five years ago. 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.

What We Can Learn From Ainsworth Game Technology's ROCE

In summary, it's unfortunate that Ainsworth Game Technology is shrinking its capital base and also generating lower returns. It should come as no surprise then that the stock has fallen 63% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 1 warning sign for Ainsworth Game Technology that we think you should be aware of.

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.

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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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