Easy Lease Motor Cycle Rental P.S.C (ADX:EASYLEASE) Could Be Struggling To Allocate Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Easy Lease Motor Cycle Rental P.S.C (ADX:EASYLEASE) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Easy Lease Motor Cycle Rental P.S.C, this is the formula:

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

0.12 = د.إ42m ÷ (د.إ528m - د.إ164m) (Based on the trailing twelve months to September 2024).

So, Easy Lease Motor Cycle Rental P.S.C has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Transportation industry average of 6.4% it's much better.

View our latest analysis for Easy Lease Motor Cycle Rental P.S.C

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 , check out these free graphs detailing revenue and cash flow performance of Easy Lease Motor Cycle Rental P.S.C.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Easy Lease Motor Cycle Rental P.S.C, we didn't gain much confidence. Around four years ago the returns on capital were 34%, but since then they've fallen to 12%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Easy Lease Motor Cycle Rental P.S.C'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 Easy Lease Motor Cycle Rental P.S.C. These trends are starting to be recognized by investors since the stock has delivered a 22% gain to shareholders who've held over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Easy Lease Motor Cycle Rental P.S.C (of which 2 are a bit unpleasant!) that you should know about.

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.