Alpha Dhabi Holding PJSC (ADX:ALPHADHABI) Is Reinvesting At Lower Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Alpha Dhabi Holding PJSC (ADX:ALPHADHABI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Alpha Dhabi Holding PJSC, this is the formula:

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

0.048 = د.إ5.0b ÷ (د.إ140b - د.إ37b) (Based on the trailing twelve months to December 2023).

So, Alpha Dhabi Holding PJSC has an ROCE of 4.8%. On its own that's a low return, but compared to the average of 3.1% generated by the Industrials industry, it's much better.

Check out our latest analysis for Alpha Dhabi Holding PJSC

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

How Are Returns Trending?

On the surface, the trend of ROCE at Alpha Dhabi Holding PJSC doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Alpha Dhabi Holding PJSC has decreased its current liabilities to 27% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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

While returns have fallen for Alpha Dhabi Holding PJSC in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And there could be an opportunity here if other metrics look good too, because the stock has declined 34% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Alpha Dhabi Holding PJSC does have some risks though, and we've spotted 1 warning sign for Alpha Dhabi Holding PJSC that you might be interested in.

While Alpha Dhabi Holding PJSC may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.