Here's What To Make Of Arkan Building Materials Company (ARKAN) PJSC's (ADX:ARKAN) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Arkan Building Materials Company (ARKAN) PJSC (ADX:ARKAN), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Arkan Building Materials Company (ARKAN) PJSC:

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

0.022 = د.إ44m ÷ (د.إ3.4b - د.إ1.4b) (Based on the trailing twelve months to September 2020).

Therefore, Arkan Building Materials Company (ARKAN) PJSC has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 9.2%.

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 want to delve into the historical earnings, revenue and cash flow of Arkan Building Materials Company (ARKAN) PJSC, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Over the past five years, Arkan Building Materials Company (ARKAN) PJSC's ROCE has remained relatively flat while the business is using 37% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 41% of total assets, this reported ROCE would probably be less than2.2% because total capital employed would be higher.The 2.2% ROCE could be even lower if current liabilities weren't 41% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

The Key Takeaway

Overall, we're not ecstatic to see Arkan Building Materials Company (ARKAN) PJSC reducing the amount of capital it employs in the business. Unsurprisingly, the stock has only gained 7.4% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Arkan Building Materials Company (ARKAN) PJSC does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

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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