Under The Bonnet, ADNOC Drilling Company P.J.S.C's (ADX:ADNOCDRILL) Returns Look Impressive

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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.

Return On Capital Employed (ROCE): What Is It?

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)

0.24 = US$981m ÷ (US$6.4b - US$2.4b) (Based on the trailing twelve months to September 2023).

So, ADNOC Drilling Company P.J.S.C has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 7.3%.

View 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 to see what analysts are forecasting going forward, you should check out our free report for ADNOC Drilling Company P.J.S.C.

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

ADNOC Drilling Company P.J.S.C has not disappointed with their ROCE growth. The figures show that over the last four years, ROCE has grown 82% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

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. Effectively this means that suppliers or short-term creditors are now funding 37% of the business, which is more than it was four years ago. 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

As discussed above, ADNOC Drilling Company P.J.S.C appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 28% return over the last year. In light of that, we think it's worth looking further into this stock because if ADNOC Drilling Company P.J.S.C can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for ADNOC Drilling Company P.J.S.C (of which 1 is concerning!) that you should know about.

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.