Returns On Capital At Arkan Building Materials Company (ARKAN) PJSC (ADX:ARKAN) Paint A Concerning Picture

When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Arkan Building Materials Company (ARKAN) PJSC (ADX:ARKAN), the trends above didn't look too great.

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. 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%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 9.4%.

View 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 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 Can We Tell From Arkan Building Materials Company (ARKAN) PJSC's ROCE Trend?

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. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Arkan Building Materials Company (ARKAN) PJSC becoming one if things continue as they have.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these concerning fundamentals, the stock has performed strongly with a 72% 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.

Arkan Building Materials Company (ARKAN) PJSC does have some risks though, and we've spotted 3 warning signs for Arkan Building Materials Company (ARKAN) PJSC that you might be interested in.

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.

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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