Alpha Dhabi Holding PJSC (ADX:ALPHADHABI) May Have Issues Allocating Its Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Alpha Dhabi Holding PJSC (ADX:ALPHADHABI), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Alpha Dhabi Holding PJSC:

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

0.03 = د.إ2.8b ÷ (د.إ121b - د.إ28b) (Based on the trailing twelve months to March 2023).

Therefore, Alpha Dhabi Holding PJSC has an ROCE of 3.0%. In absolute terms, that's a low return, but it's much better than the Industrials industry average of 1.8%.

View 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'd like to look at how Alpha Dhabi Holding PJSC has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Alpha Dhabi Holding PJSC, we didn't gain much confidence. Around four years ago the returns on capital were 18%, but since then they've fallen to 3.0%. 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 related note, Alpha Dhabi Holding PJSC has decreased its current liabilities to 24% of total assets. So we could link some of this to the decrease in ROCE. 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.

Our Take On Alpha Dhabi Holding PJSC's ROCE

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. However, despite the promising trends, the stock has fallen 18% over the last year, so there might be an opportunity here for astute investors. 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.

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.