Returns At R.A.K. Ceramics P.J.S.C (ADX:RAKCEC) Are On The Way Up

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So on that note, R.A.K. Ceramics P.J.S.C (ADX:RAKCEC) looks quite promising in regards to its trends of return on capital.

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

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)

0.12 = د.إ422m ÷ (د.إ5.4b - د.إ1.9b) (Based on the trailing twelve months to September 2023).

So, R.A.K. Ceramics P.J.S.C has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Building industry.

View 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.

What The Trend Of ROCE Can Tell Us

R.A.K. Ceramics P.J.S.C is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 61% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

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

To sum it up, R.A.K. Ceramics P.J.S.C is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 146% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if R.A.K. Ceramics P.J.S.C can keep these trends up, it could have a bright future ahead.

On a final note, we found 3 warning signs for R.A.K. Ceramics P.J.S.C (1 is a bit unpleasant) you should be aware of.

While R.A.K. Ceramics P.J.S.C 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.