If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. However, after investigating Arkan Building Materials Company (ARKAN) PJSC (ADX:EMSTEEL), we don't think it's current trends fit the mold of a multi-bagger.
What is Return On Capital Employed (ROCE)?
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. 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)
0.017 = د.إ137m ÷ (د.إ12b - د.إ3.4b) (Based on the trailing twelve months to March 2022).
Thus, Arkan Building Materials Company (ARKAN) PJSC has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 8.0%.
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'd like to look at how Arkan Building Materials Company (ARKAN) PJSC has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
On the surface, the trend of ROCE at Arkan Building Materials Company (ARKAN) PJSC doesn't inspire confidence. To be more specific, ROCE has fallen from 3.1% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
What We Can Learn From Arkan Building Materials Company (ARKAN) PJSC's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Arkan Building Materials Company (ARKAN) PJSC. And the stock has followed suit returning a meaningful 80% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
If you want to continue researching Arkan Building Materials Company (ARKAN) PJSC, you might be interested to know about the 2 warning signs that our analysis has discovered.
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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