Ensteel Building Materials PJSC (ADX:EMSTEEL) Might Have The Makings Of A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So on that note, Ensteel Building Materials PJSC (ADX:EMSTEEL) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Ensteel Building Materials PJSC is:

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

0.065 = د.إ573m ÷ (د.إ11b - د.إ2.3b) (Based on the trailing twelve months to September 2023).

Therefore, Ensteel Building Materials PJSC has an ROCE of 6.5%. On its own that's a low return, but compared to the average of 3.7% generated by the Basic Materials industry, it's much better.

Check out our latest analysis for Ensteel Building Materials PJSC

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ensteel Building Materials PJSC's ROCE against it's prior returns. If you're interested in investigating Ensteel Building Materials PJSC's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Ensteel Building Materials PJSC's ROCE Trend?

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 6.5%. Basically the business is earning more per dollar of capital invested and in addition to that, 250% more capital is being employed now too. So we're very much inspired by what we're seeing at Ensteel Building Materials PJSC thanks to its ability to profitably reinvest capital.

The Bottom Line

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 Ensteel Building Materials PJSC has. Since the stock has returned a staggering 181% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

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.