Is Dubai Refreshment (P.J.S.C.) (DFM:DRC) Struggling?

What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. 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. So after glancing at the trends within Dubai Refreshment (P.J.S.C.) (DFM:DRC), we weren't too hopeful.

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. The formula for this calculation on Dubai Refreshment (P.J.S.C.) is:

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

0.059 = د.إ58m ÷ (د.إ1.2b - د.إ175m) (Based on the trailing twelve months to September 2020).

Thus, Dubai Refreshment (P.J.S.C.) has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 9.2%.

See 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're interested in investigating Dubai Refreshment (P.J.S.C.)'s past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

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 13% 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.

What We Can Learn From Dubai Refreshment (P.J.S.C.)'s ROCE

In summary, it's unfortunate that Dubai Refreshment (P.J.S.C.) is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 31% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Dubai Refreshment (P.J.S.C.) does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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. 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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