Returns On Capital At ADNOC Drilling Company P.J.S.C (ADX:ADNOCDRILL) Have Hit The Brakes

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at ADNOC Drilling Company P.J.S.C (ADX:ADNOCDRILL), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for ADNOC Drilling Company P.J.S.C, this is the formula:

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

0.16 = US$726m ÷ (US$5.2b - US$748m) (Based on the trailing twelve months to June 2022).

So, ADNOC Drilling Company P.J.S.C has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Energy Services industry average of 6.0% it's much better.

View 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.

So How Is ADNOC Drilling Company P.J.S.C's ROCE Trending?

Over the past three years, ADNOC Drilling Company P.J.S.C's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if ADNOC Drilling Company P.J.S.C doesn't end up being a multi-bagger in a few years time. On top of that you'll notice that ADNOC Drilling Company P.J.S.C has been paying out a large portion (76%) of earnings in the form of dividends to shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.

The Key Takeaway

In a nutshell, ADNOC Drilling Company P.J.S.C has been trudging along with the same returns from the same amount of capital over the last three years. Although the market must be expecting these trends to improve because the stock has gained 20% over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing to note, we've identified 1 warning sign with ADNOC Drilling Company P.J.S.C and understanding it should be part of your investment process.

While ADNOC Drilling Company 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.

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.