Here's What's Concerning About Dubai Refreshment (P.J.S.C.)'s (DFM:DRC) Returns On 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. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Dubai Refreshment (P.J.S.C.) (DFM:DRC), the trends above didn't look too great.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Dubai Refreshment (P.J.S.C.):

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

0.095 = د.إ101m ÷ (د.إ1.3b - د.إ215m) (Based on the trailing twelve months to September 2022).

So, Dubai Refreshment (P.J.S.C.) has an ROCE of 9.5%. In absolute terms, that's a low return but it's around the Consumer Retailing industry average of 8.8%.

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 want to delve into the historical earnings, revenue and cash flow of Dubai Refreshment (P.J.S.C.), check out these free graphs here.

What Does the ROCE Trend For Dubai Refreshment (P.J.S.C.) Tell Us?

There is reason to be cautious about Dubai Refreshment (P.J.S.C.), given the returns are trending downwards. About five years ago, returns on capital were 13%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Dubai Refreshment (P.J.S.C.) becoming one if things continue as they have.

What We Can Learn From 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. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 56% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about Dubai Refreshment (P.J.S.C.), we've spotted 2 warning signs, and 1 of them is a bit concerning.

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.

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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.