How Well Is R.A.K. Ceramics P.J.S.C (ADX:RAKCEC) Allocating Its Capital?

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within R.A.K. Ceramics P.J.S.C (ADX:RAKCEC), we weren't too hopeful.

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 R.A.K. Ceramics P.J.S.C, this is the formula:

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

0.049 = د.إ166m ÷ (د.إ5.5b - د.إ2.1b) (Based on the trailing twelve months to September 2020).

So, R.A.K. Ceramics P.J.S.C has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Building industry average of 9.3%.

Check out our latest analysis for R.A.K. Ceramics P.J.S.C

In the above chart we have measured R.A.K. Ceramics P.J.S.C's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering R.A.K. Ceramics P.J.S.C here for free.

So How Is R.A.K. Ceramics P.J.S.C's ROCE Trending?

In terms of R.A.K. Ceramics P.J.S.C's historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 8.0% five years ago but has since fallen to 4.9%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 22% over that same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

Our Take On R.A.K. Ceramics P.J.S.C's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. It should come as no surprise then that the stock has fallen 12% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for R.A.K. Ceramics P.J.S.C (of which 1 is potentially serious!) that you should know about.

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