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

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Arkan Building Materials Company (ARKAN) PJSC (ADX:EMSTEEL) looks quite promising in regards to its trends of return on capital.

Understanding 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)

0.06 = د.إ500m ÷ (د.إ12b - د.إ3.4b) (Based on the trailing twelve months to September 2022).

Therefore, Arkan Building Materials Company (ARKAN) PJSC has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 7.7%.

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

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 6.0%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 210%. So we're very much inspired by what we're seeing at Arkan Building Materials Company (ARKAN) PJSC thanks to its ability to profitably reinvest capital.

In Conclusion...

To sum it up, Arkan Building Materials Company (ARKAN) PJSC has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 116% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Arkan Building Materials Company (ARKAN) PJSC does have some risks though, and we've spotted 1 warning sign 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.

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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.