Capital returns at ADNOC Drilling Company PJSC (ADX: ADNOCDRILL) held back

To find a multi-bagger stock, what underlying trends should we look for in a company? First, we’ll want to see proof come back on capital employed (ROCE) which is increasing, and on the other hand, a base capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. Although, when we looked ADNOC PJSC drilling company (ADX:ADNOCDRILL), it didn’t seem to tick all those boxes.

What is return on capital employed (ROCE)?

For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. To calculate this metric for ADNOC Drilling Company PJSC, here is the formula:

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

0.16 = $726 million ÷ ($5.2 billion – $748 million) (Based on the last twelve months to June 2022).

So, ADNOC Drilling Company PJSC has a ROCE of 16%. In absolute terms, that’s a decent return, but compared to the energy services industry average of 6.0%, it’s much better.

Check out our latest analysis for ADNOC Drilling Company PJSC

ADX:ADNOCDRILL Return on Capital Employed October 9, 2022

In the chart above, we measured ADNOC Drilling Company PJSC’s past ROCE against its past performance, but the future is arguably more important. If you wish, you can view analyst forecasts covering ADNOC Drilling Company PJSC here for free.

So, what is the ROCE trend of ADNOC Drilling Company PJSC?

Over the past three years, the ROCE and capital employed of ADNOC Drilling Company PJSC remained virtually unchanged. This tells us that the company is not reinvesting in itself, so it is plausible that it is past the growth phase. So don’t be surprised if ADNOC Drilling Company PJSC doesn’t end up being a multi-bagger in a few years. On top of that, you will notice that ADNOC Drilling Company PJSC paid out a large portion (76%) of its profits as dividends to shareholders. These mature businesses usually have reliable revenues and few places to reinvest them. The best option is therefore to put the income in the pockets of the shareholders.

The Key Takeaway

In a nutshell, ADNOC Drilling Company PJSC has tracked the same returns with the same amount of capital over the past three years. Although the market should expect these trends to improve as the stock has gained 20% over the past year. Ultimately, if the underlying trends persist, we won’t be holding our breath that this is a multi-bagger going forward.

One more thing to note, we have identified 1 warning sign with ADNOC Drilling Company PJSC and understanding it should be part of your investment process.

Although ADNOC Drilling Company PJSC does not generate the highest return, check out this free list of companies that achieve high returns on equity with strong balance sheets.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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Find out if ADNOC PJSC drilling company 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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