Be Wary Of Alpha Dhabi Holding PJSC (ADX:ALPHADHABI) And Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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.

Understanding 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. 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)

0.031 = د.إ3.1b ÷ (د.إ134b - د.إ33b) (Based on the trailing twelve months to September 2023).

So, Alpha Dhabi Holding PJSC has an ROCE of 3.1%. On its own that's a low return, but compared to the average of 1.6% 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 of past earnings, revenue and cash flow.

So How Is Alpha Dhabi Holding PJSC's ROCE Trending?

When we looked at the ROCE trend at Alpha Dhabi Holding PJSC, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last four 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. 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 25% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Alpha Dhabi Holding PJSC is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 31% 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.

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.