Is Dubai Refreshment (P.J.S.C.) (DFM:DRC) Using Capital Effectively?

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Dubai Refreshment (P.J.S.C.) (DFM:DRC) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.057 = د.إ57m ÷ (د.إ1.2b - د.إ174m) (Based on the trailing twelve months to December 2020).

Therefore, Dubai Refreshment (P.J.S.C.) has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 9.7%.

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.

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.

The Bottom Line

In summary, it's unfortunate that Dubai Refreshment (P.J.S.C.) is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 21% 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.

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

While Dubai Refreshment (P.J.S.C.) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

When trading Dubai Refreshment (P.J.S.C.) or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.