Arkan Building Materials Company (ARKAN) PJSC (ADX:ARKAN) Will Be Looking To Turn Around Its Returns

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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 to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Arkan Building Materials Company (ARKAN) PJSC (ADX:ARKAN), we've spotted some signs that it could be struggling, so let's investigate.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Arkan Building Materials Company (ARKAN) PJSC, this is the formula:

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

0.014 = د.إ32m ÷ (د.إ3.3b - د.إ937m) (Based on the trailing twelve months to December 2020).

Therefore, Arkan Building Materials Company (ARKAN) PJSC has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 9.3%.

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

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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 The Trend Of ROCE Can Tell Us

The trend of returns that Arkan Building Materials Company (ARKAN) PJSC is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 1.4% we see today. On top of that, the business is utilizing 21% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

What We Can Learn From Arkan Building Materials Company (ARKAN) PJSC's ROCE

To see Arkan Building Materials Company (ARKAN) PJSC reducing the capital employed in the business in tandem with diminishing returns, is concerning. Long term shareholders who've owned the stock over the last five years have experienced a 14% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing, we've spotted 2 warning signs facing Arkan Building Materials Company (ARKAN) PJSC that you might find interesting.

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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