Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. With that in mind, the ROCE of Aramex PJSC (DFM:ARMX) looks decent, right now, so lets see what the trend of returns can tell us.
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. Analysts use this formula to calculate it for Aramex PJSC:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = د.إ510m ÷ (د.إ6.1b - د.إ2.3b) (Based on the trailing twelve months to December 2020).
Thus, Aramex PJSC has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Logistics industry average of 8.8% it's much better.
Check out our latest analysis for Aramex PJSC
In the above chart we have measured Aramex PJSC's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Aramex PJSC's ROCE Trend?
While the current returns on capital are decent, they haven't changed much. The company has consistently earned 14% for the last five years, and the capital employed within the business has risen 44% in that time. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 38% of total assets, this reported ROCE would probably be less than14% because total capital employed would be higher.The 14% ROCE could be even lower if current liabilities weren't 38% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.
What We Can Learn From Aramex PJSC's ROCE
To sum it up, Aramex PJSC has simply been reinvesting capital steadily, at those decent rates of return. And given the stock has only risen 39% over the last five years, we'd suspect the market is beginning to recognize these trends. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
On a separate note, we've found 2 warning signs for Aramex PJSC you'll probably want to 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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About DFM:ARMX
Aramex PJSC
Engages in the investment of freight, express, logistics, and supply chain management businesses in the United Arab Emirates, the Middle East, North Africa, Turkey, East and South Africa, Europe, North America, North and South Asia, and Oceania.
Proven track record and fair value.
