Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we look at a few key financial metrics. Among other things, we will want to see two things; first, growth come back on capital employed (ROCE) and on the other hand, an expansion of the amount capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. Speaking of which, we’ve noticed big changes in Arkan Building Materials Company (ARKAN) PJSC (ADX: EMSTEEL) returns to capital, so let’s look.
Return on capital employed (ROCE): what is it?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for Arkan Building Materials Company (ARKAN) PJSC:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.046 = Ï.å381m ÷ (ï.å12b – ï.å3.8b) (Based on the last twelve months to June 2022).
Therefore, Arkan Building Materials Company (ARKAN) PJSC has a ROCE of 4.6%. Ultimately, that’s a weak return, and it’s below the base materials industry average of 7.8%.
Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to further investigate the past of Arkan Building Materials Company (ARKAN) PJSC, check out this free chart of past profits, revenue and cash flow.
What is the return trend?
Even though ROCE is still weak in absolute terms, it is good to see that it is heading in the right direction. The data shows that capital returns have increased significantly over the past five years to 4.6%. The amount of capital employed also increased by 200%. Increasing returns on an increasing amount of capital are common among multi-baggers and that’s why we’re impressed.
For the record though, there was a noticeable increase in the company’s current liabilities over the period, so we would attribute some of the ROCE growth to that. Current liabilities have increased to 31% of total assets, so the company is now financed more by suppliers or short-term creditors. Keep an eye out for future increases, because when the ratio of current liabilities to total assets becomes particularly high, it can introduce new risks to the business.
What we can learn from the ROCE of Arkan Building Materials Company (ARKAN) PJSC
A business that increases its returns on capital and can constantly reinvest in itself is a highly sought after trait, and that is what Arkan Building Materials Company (ARKAN) PJSC possesses. Given that the stock has returned a solid 100% to shareholders over the past five years, it’s fair to say that investors are starting to recognize these changes. Therefore, we think it would be worth checking whether these trends will continue.
One more thing we spotted 1 warning sign facing Arkan Building Materials Company (ARKAN) PJSC that you might find interesting.
Although Arkan Building Materials Company (ARKAN) PJSC does not currently generate the highest returns, we have compiled a list of companies that currently generate more than 25% return on equity. look at this free list here.
Valuation is complex, but we help make it simple.
Find out if Arkan Building Materials Company (ARKAN) PJSC is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
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