Investors Met With Slowing Returns on Capital At Fujairah Building Industries P.J.S.C (ADX:FBI)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Fujairah Building Industries P.J.S.C (ADX:FBI) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Fujairah Building Industries P.J.S.C:

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

0.065 = د.إ27m ÷ (د.إ461m - د.إ42m) (Based on the trailing twelve months to December 2021).

So, Fujairah Building Industries P.J.S.C has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 9.1%.

View our latest analysis for Fujairah Building Industries P.J.S.C

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

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Fujairah Building Industries P.J.S.C. The company has employed 40% more capital in the last five years, and the returns on that capital have remained stable at 6.5%. 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.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 9.1% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Fujairah Building Industries P.J.S.C's ROCE

Long story short, while Fujairah Building Industries P.J.S.C 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 106% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 3 warning signs for Fujairah Building Industries P.J.S.C that we think you should be aware of.

While Fujairah Building Industries P.J.S.C 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.

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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.