Emirates Driving Company P.J.S.C. (ADX:DRIVE) Earns A Nice Return On Capital Employed

Today we'll evaluate Emirates Driving Company P.J.S.C. (ADX:DRIVE) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for Emirates Driving Company P.J.S.C:

0.14 = د.إ107m ÷ (د.إ796m - د.إ46m) (Based on the trailing twelve months to December 2019.)

Therefore, Emirates Driving Company P.J.S.C has an ROCE of 14%.

See our latest analysis for Emirates Driving Company P.J.S.C

Does Emirates Driving Company P.J.S.C Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Emirates Driving Company P.J.S.C's ROCE appears to be substantially greater than the 9.1% average in the Consumer Services industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Separate from how Emirates Driving Company P.J.S.C stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

The image below shows how Emirates Driving Company P.J.S.C's ROCE compares to its industry, and you can click it to see more detail on its past growth.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Emirates Driving Company P.J.S.C has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Emirates Driving Company P.J.S.C's Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

Emirates Driving Company P.J.S.C has current liabilities of د.إ46m and total assets of د.إ796m. Therefore its current liabilities are equivalent to approximately 5.8% of its total assets. Emirates Driving Company P.J.S.C reports few current liabilities, which have a negligible impact on its unremarkable ROCE.

Our Take On Emirates Driving Company P.J.S.C's ROCE

Emirates Driving Company P.J.S.C looks like an ok business, but on this analysis it is not at the top of our buy list. You might be able to find a better investment than Emirates Driving Company P.J.S.C. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

I will like Emirates Driving Company P.J.S.C better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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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. Thank you for reading.