Dubai Refreshment (P.J.S.C.) (DFM:DRC) Could Be Struggling To Allocate Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Dubai Refreshment (P.J.S.C.) (DFM:DRC), we weren't too upbeat about how things were going.

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. To calculate this metric for Dubai Refreshment (P.J.S.C.), this is the formula:

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

0.085 = د.إ84m ÷ (د.إ1.2b - د.إ191m) (Based on the trailing twelve months to June 2021).

Therefore, Dubai Refreshment (P.J.S.C.) has an ROCE of 8.5%. Even though it's in line with the industry average of 8.5%, it's still a low return by itself.

View our latest analysis for Dubai Refreshment (P.J.S.C.)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Dubai Refreshment (P.J.S.C.)'s ROCE against it's prior returns. If you'd like to look at how Dubai Refreshment (P.J.S.C.) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Dubai Refreshment (P.J.S.C.)'s ROCE Trending?

We are a bit worried about the trend of returns on capital at Dubai Refreshment (P.J.S.C.). To be more specific, the ROCE was 12% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Dubai Refreshment (P.J.S.C.) to turn into a multi-bagger.

Our Take On Dubai Refreshment (P.J.S.C.)'s ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 138%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we found 2 warning signs for Dubai Refreshment (P.J.S.C.) (1 shouldn't be ignored) you should be aware of.

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.

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.

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