Returns On Capital Signal Difficult Times Ahead For Response Plus Holding PJSC (ADX:RPM)

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Response Plus Holding PJSC (ADX:RPM), the trends above didn't look too great.

Understanding 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. The formula for this calculation on Response Plus Holding PJSC is:

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

0.13 = د.إ30m ÷ (د.إ314m - د.إ80m) (Based on the trailing twelve months to December 2022).

So, Response Plus Holding PJSC has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 11% generated by the Healthcare industry.

See our latest analysis for Response Plus Holding PJSC

Historical performance is a great place to start when researching a stock so above you can see the gauge for Response Plus Holding PJSC's ROCE against it's prior returns. If you'd like to look at how Response Plus Holding PJSC has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Response Plus Holding PJSC's ROCE Trending?

In terms of Response Plus Holding PJSC's historical ROCE movements, the trend doesn't inspire confidence. About one year ago, returns on capital were 26%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Response Plus Holding PJSC to turn into a multi-bagger.

What We Can Learn From Response Plus Holding PJSC's ROCE

In summary, it's unfortunate that Response Plus Holding PJSC is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 33% from where it was year ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Response Plus Holding PJSC does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.