We Like ADNOC Drilling Company P.J.S.C's (ADX:ADNOCDRILL) Returns And Here's How They're Trending

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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 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. The formula for this calculation on ADNOC Drilling Company P.J.S.C is:

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

0.29 = US$910m ÷ (US$5.5b - US$2.3b) (Based on the trailing twelve months to June 2023).

So, ADNOC Drilling Company P.J.S.C has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 6.9% earned by companies in a similar industry.

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.

The Trend Of ROCE

We're pretty happy with how the ROCE has been trending at ADNOC Drilling Company P.J.S.C. We found that the returns on capital employed over the last four years have risen by 103%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 32% less capital than it was four years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 42% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

What We Can Learn From ADNOC Drilling Company P.J.S.C's ROCE

In summary, it's great to see that ADNOC Drilling Company P.J.S.C has been able to turn things around and earn higher returns on lower amounts of capital. And with a respectable 15% 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. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 1 warning sign facing ADNOC Drilling Company P.J.S.C that you might find interesting.

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.

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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.