Emsteel Building Materials PJSC's (ADX:EMSTEEL) Returns Have Hit A Wall

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 briefly looking over the numbers, we don't think Emsteel Building Materials PJSC (ADX:EMSTEEL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 Emsteel Building Materials PJSC, this is the formula:

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

0.045 = د.إ404m ÷ (د.إ11b - د.إ1.9b) (Based on the trailing twelve months to September 2024).

Thus, Emsteel Building Materials PJSC has an ROCE of 4.5%. In absolute terms, that's a low return but it's around the Basic Materials industry average of 3.9%.

Check out our latest analysis for Emsteel Building Materials PJSC

Historical performance is a great place to start when researching a stock so above you can see the gauge for Emsteel Building Materials PJSC's ROCE against it's prior returns. If you'd like to look at how Emsteel Building Materials PJSC has performed in the past in other metrics, you can view this free graph of Emsteel Building Materials PJSC's past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Emsteel Building Materials PJSC's historical ROCE trend, it doesn't exactly demand attention. The company has employed 349% more capital in the last five years, and the returns on that capital have remained stable at 4.5%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Emsteel Building Materials PJSC has done well to reduce current liabilities to 18% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line

Long story short, while Emsteel Building Materials PJSC has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 172% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 1 warning sign for Emsteel Building Materials PJSC that we think you should be aware of.

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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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.