Capital Allocation Trends At Al Seer Marine Supplies and Equipment Company PJSC (ADX:ASM) Aren't Ideal

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Al Seer Marine Supplies and Equipment Company PJSC (ADX:ASM) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Al Seer Marine Supplies and Equipment Company PJSC is:

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

0.01 = د.إ96m ÷ (د.إ9.6b - د.إ259m) (Based on the trailing twelve months to December 2022).

So, Al Seer Marine Supplies and Equipment Company PJSC has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 7.0%.

Check out our latest analysis for Al Seer Marine Supplies and Equipment Company PJSC

Historical performance is a great place to start when researching a stock so above you can see the gauge for Al Seer Marine Supplies and Equipment Company PJSC's ROCE against it's prior returns. If you'd like to look at how Al Seer Marine Supplies and Equipment Company PJSC has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Al Seer Marine Supplies and Equipment Company PJSC's ROCE Trend?

In terms of Al Seer Marine Supplies and Equipment Company PJSC's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 22%, but since then they've fallen to 1.0%. 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 side note, Al Seer Marine Supplies and Equipment Company PJSC has done well to pay down its current liabilities to 2.7% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Al Seer Marine Supplies and Equipment Company PJSC is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 37% 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.

One final note, you should learn about the 2 warning signs we've spotted with Al Seer Marine Supplies and Equipment Company PJSC (including 1 which doesn't sit too well with us) .

While Al Seer Marine Supplies and Equipment Company 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.