Returns On Capital Signal Tricky Times Ahead For Alpha Dhabi Holding PJSC (ADX:ALPHADHABI)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Alpha Dhabi Holding PJSC (ADX:ALPHADHABI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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What Is 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. 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)

0.078 = د.إ9.6b ÷ (د.إ178b - د.إ55b) (Based on the trailing twelve months to December 2024).

Therefore, Alpha Dhabi Holding PJSC has an ROCE of 7.8%. On its own that's a low return, but compared to the average of 4.1% generated by the Industrials industry, it's much better.

Check out our latest analysis for Alpha Dhabi Holding PJSC

In the above chart we have measured Alpha Dhabi Holding PJSC'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 analyst report for Alpha Dhabi Holding PJSC .

The Trend Of ROCE

Unfortunately, the trend isn't great with ROCE falling from 13% five years ago, while capital employed has grown 7,748%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Alpha Dhabi Holding PJSC probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Alpha Dhabi Holding PJSC has decreased its current liabilities to 31% 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 Bottom Line On Alpha Dhabi Holding 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 Alpha Dhabi Holding PJSC. However, despite the promising trends, the stock has fallen 59% over the last three years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to know some of the risks facing Alpha Dhabi Holding PJSC we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

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. 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.