Returns On Capital Signal Difficult Times Ahead For Salik Company P.J.S.C (DFM:SALIK)

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Salik Company P.J.S.C (DFM:SALIK), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Salik Company P.J.S.C is:

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

0.29 = د.إ1.4b ÷ (د.إ5.3b - د.إ537m) (Based on the trailing twelve months to June 2024).

Therefore, Salik Company P.J.S.C has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Infrastructure industry average of 6.5%.

View our latest analysis for Salik Company P.J.S.C

In the above chart we have measured Salik Company P.J.S.C's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Salik Company P.J.S.C for free.

So How Is Salik Company P.J.S.C's ROCE Trending?

We are a bit worried about the trend of returns on capital at Salik Company P.J.S.C. Unfortunately the returns on capital have diminished from the 38% that they were earning two years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Salik Company P.J.S.C to turn into a multi-bagger.

On a side note, Salik Company P.J.S.C has done well to pay down its current liabilities to 10% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Salik Company P.J.S.C's ROCE

In summary, it's unfortunate that Salik Company P.J.S.C is generating lower returns from the same amount of capital. However the stock has delivered a 29% return to shareholders over the last year, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we've found 2 warning signs for Salik Company P.J.S.C that we think you should be aware of.

Salik Company P.J.S.C is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.