Arkan Building Materials Company (ARKAN) PJSC (ADX:ARKAN) Could Be At Risk Of Shrinking As A Company

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Arkan Building Materials Company (ARKAN) PJSC (ADX:ARKAN) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What is it?

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 Arkan Building Materials Company (ARKAN) PJSC is:

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

0.0027 = د.إ6.6m ÷ (د.إ3.1b - د.إ670m) (Based on the trailing twelve months to September 2021).

Thus, Arkan Building Materials Company (ARKAN) PJSC has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 8.8%.

See our latest analysis for Arkan Building Materials Company (ARKAN) PJSC

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

What Does the ROCE Trend For Arkan Building Materials Company (ARKAN) PJSC Tell Us?

In terms of Arkan Building Materials Company (ARKAN) PJSC's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 2.7%, 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. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Arkan Building Materials Company (ARKAN) PJSC to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Arkan Building Materials Company (ARKAN) PJSC is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 82% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about Arkan Building Materials Company (ARKAN) PJSC, we've spotted 4 warning signs, and 3 of them can't be ignored.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.