Returns On Capital Signal Tricky Times Ahead For Al Seer Marine Supplies and Equipment Company PJSC (ADX:ASM)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Al Seer Marine Supplies and Equipment Company PJSC (ADX:ASM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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. 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)

0.012 = د.إ107m ÷ (د.إ9.1b - د.إ367m) (Based on the trailing twelve months to December 2023).

Therefore, Al Seer Marine Supplies and Equipment Company PJSC has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 7.3%.

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

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Al Seer Marine Supplies and Equipment Company PJSC's past further, check out this free graph covering Al Seer Marine Supplies and Equipment Company PJSC's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Al Seer Marine Supplies and Equipment Company PJSC, we didn't gain much confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 1.2%. 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, Al Seer Marine Supplies and Equipment Company PJSC has decreased its current liabilities to 4.0% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Al Seer Marine Supplies and Equipment Company PJSC's ROCE

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. These growth trends haven't led to growth returns though, since the stock has fallen 37% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a separate note, we've found 2 warning signs for Al Seer Marine Supplies and Equipment Company PJSC you'll probably want to know about.

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.