ADNOC Drilling Company P.J.S.C (ADX:ADNOCDRILL) Could Become A Multi-Bagger

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. With that in mind, the ROCE of ADNOC Drilling Company P.J.S.C (ADX:ADNOCDRILL) looks great, so lets see what the trend can tell us.

Understanding 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. Analysts use this formula to calculate it for ADNOC Drilling Company P.J.S.C:

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

0.27 = US$827m ÷ (US$5.5b - US$2.4b) (Based on the trailing twelve months to December 2022).

So, ADNOC Drilling Company P.J.S.C has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 6.8%.

See our latest analysis for ADNOC Drilling Company P.J.S.C

In the above chart we have measured ADNOC Drilling Company 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 ADNOC Drilling Company P.J.S.C here for free.

What The Trend Of ROCE Can Tell Us

We're pretty happy with how the ROCE has been trending at ADNOC Drilling Company P.J.S.C. The data shows that returns on capital have increased by 71% over the trailing four years. The company is now earning US$0.3 per dollar of capital employed. In regards to capital employed, ADNOC Drilling Company P.J.S.C appears to been achieving more with less, since the business is using 30% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 44% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

Our Take On ADNOC Drilling Company P.J.S.C's ROCE

From what we've seen above, ADNOC Drilling Company P.J.S.C has managed to increase it's returns on capital all the while reducing it's capital base. And with a respectable 9.9% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we've found 2 warning signs for ADNOC Drilling Company P.J.S.C that we think you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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

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.