The Returns On Capital At Abu Dhabi Ship Building PJSC (ADX:ADSB) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Abu Dhabi Ship Building PJSC (ADX:ADSB), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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 Abu Dhabi Ship Building PJSC, this is the formula:

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

0.01 = د.إ12m ÷ (د.إ1.5b - د.إ348m) (Based on the trailing twelve months to June 2022).

Therefore, Abu Dhabi Ship Building PJSC has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 6.6%.

Check out our latest analysis for Abu Dhabi Ship Building PJSC

Historical performance is a great place to start when researching a stock so above you can see the gauge for Abu Dhabi Ship Building PJSC's ROCE against it's prior returns. If you're interested in investigating Abu Dhabi Ship Building PJSC's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Abu Dhabi Ship Building PJSC's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 10%, but since then they've fallen to 1.0%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Abu Dhabi Ship Building PJSC has done well to pay down its current liabilities to 23% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Abu Dhabi Ship Building PJSC's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Abu Dhabi Ship Building PJSC. And the stock has followed suit returning a meaningful 81% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Abu Dhabi Ship Building PJSC does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.