Investors Should Be Encouraged By ADNOC Drilling Company P.J.S.C's (ADX:ADNOCDRILL) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in ADNOC Drilling Company P.J.S.C's (ADX:ADNOCDRILL) returns on capital, so let's have a look.

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 ADNOC Drilling Company P.J.S.C:

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

0.23 = US$1.3b ÷ (US$7.1b - US$1.4b) (Based on the trailing twelve months to June 2024).

So, ADNOC Drilling Company P.J.S.C has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 9.1%.

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

Above you can see how the current ROCE for ADNOC Drilling Company P.J.S.C compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering ADNOC Drilling Company P.J.S.C for free.

The Trend Of ROCE

The trends we've noticed at ADNOC Drilling Company P.J.S.C are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 20% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 20% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

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

To sum it up, ADNOC Drilling Company P.J.S.C has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 20% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing ADNOC Drilling Company P.J.S.C, we've discovered 2 warning signs that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.