Here's What To Make Of R.A.K. Ceramics P.J.S.C's (ADX:RAKCEC) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating R.A.K. Ceramics P.J.S.C (ADX:RAKCEC), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for R.A.K. Ceramics P.J.S.C, this is the formula:

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

0.082 = د.إ288m ÷ (د.إ5.4b - د.إ1.9b) (Based on the trailing twelve months to March 2020).

Thus, R.A.K. Ceramics P.J.S.C has an ROCE of 8.2%. On its own, that's a low figure but it's around the 9.3% average generated by the Building industry.

See our latest analysis for R.A.K. Ceramics P.J.S.C

In the above chart we have a measured R.A.K. Ceramics P.J.S.C'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 R.A.K. Ceramics P.J.S.C.

What Can We Tell From R.A.K. Ceramics P.J.S.C's ROCE Trend?

Over the past five years, R.A.K. Ceramics P.J.S.C's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect R.A.K. Ceramics P.J.S.C to be a multi-bagger going forward. On top of that you'll notice that R.A.K. Ceramics P.J.S.C has been paying out a large portion (87%) of earnings in the form of dividends to shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.

What We Can Learn From R.A.K. Ceramics P.J.S.C's ROCE

We can conclude that in regards to R.A.K. Ceramics P.J.S.C's returns on capital employed and the trends, there isn't much change to report on. Since the stock has declined 29% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for R.A.K. Ceramics P.J.S.C (of which 1 is potentially serious!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.
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