Investors Could Be Concerned With Emirates Central Cooling Systems' (DFM:EMPOWER) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Emirates Central Cooling Systems (DFM:EMPOWER) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Emirates Central Cooling Systems is:

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

0.13 = د.إ1.1b ÷ (د.إ9.7b - د.إ1.5b) (Based on the trailing twelve months to December 2023).

Therefore, Emirates Central Cooling Systems has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Water Utilities industry average of 6.9% it's much better.

See our latest analysis for Emirates Central Cooling Systems

In the above chart we have measured Emirates Central Cooling Systems' 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 Emirates Central Cooling Systems for free.

What Can We Tell From Emirates Central Cooling Systems' ROCE Trend?

When we looked at the ROCE trend at Emirates Central Cooling Systems, we didn't gain much confidence. Around four years ago the returns on capital were 17%, but since then they've fallen to 13%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Emirates Central Cooling Systems has decreased its current liabilities to 16% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

What We Can Learn From Emirates Central Cooling Systems' ROCE

Bringing it all together, while we're somewhat encouraged by Emirates Central Cooling Systems' reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last year has been flat. Therefore based on the analysis done in this article, we don't think Emirates Central Cooling Systems has the makings of a multi-bagger.

One more thing, we've spotted 2 warning signs facing Emirates Central Cooling Systems that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.