Stock Analysis

Arkan Building Materials Company (ARKAN) PJSC (ADX:EMSTEEL) Is Looking To Continue Growing Its Returns On Capital

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ADX:EMSTEEL
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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Arkan Building Materials Company (ARKAN) PJSC's (ADX:EMSTEEL) returns on capital, so let's have a look.

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. 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)

0.046 = د.إ381m ÷ (د.إ12b - د.إ3.8b) (Based on the trailing twelve months to June 2022).

Therefore, Arkan Building Materials Company (ARKAN) PJSC has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 7.8%.

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

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ADX:EMSTEEL Return on Capital Employed October 26th 2022

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.

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 4.6%. The amount of capital employed has increased too, by 200%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 31% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

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

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Arkan Building Materials Company (ARKAN) PJSC has. Since the stock has returned a solid 100% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 1 warning sign facing Arkan Building Materials Company (ARKAN) PJSC that you might find interesting.

While Arkan Building Materials Company (ARKAN) PJSC may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Valuation is complex, but we're helping make it simple.

Find out whether Arkan Building Materials Company (ARKAN) PJSC is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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