Capital Allocation Trends At Arkan Building Materials Company (ARKAN) PJSC (ADX:ARKAN) Aren't Ideal

When researching a stock for investment, what can tell us that the company is in decline? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Arkan Building Materials Company (ARKAN) PJSC (ADX:ARKAN), the trends above didn't look too great.

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. 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)

0.0017 = د.إ4.1m ÷ (د.إ3.1b - د.إ681m) (Based on the trailing twelve months to June 2021).

Thus, Arkan Building Materials Company (ARKAN) PJSC has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 9.9%.

View 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're interested in investigating Arkan Building Materials Company (ARKAN) PJSC's past further, check out this free graph of past earnings, revenue and cash flow.

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

We are a bit worried about the trend of returns on capital at Arkan Building Materials Company (ARKAN) PJSC. About five years ago, returns on capital were 2.4%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Arkan Building Materials Company (ARKAN) PJSC to turn into a multi-bagger.

The Key Takeaway

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 51% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 3 warning signs for Arkan Building Materials Company (ARKAN) PJSC (2 are concerning) you should be aware of.

While Arkan Building Materials Company (ARKAN) PJSC isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.
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