Returns On Capital Signal Tricky Times Ahead For Emirates Central Cooling Systems (DFM:EMPOWER)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Having said that, from a first glance at Emirates Central Cooling Systems (DFM:EMPOWER) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

We've discovered 2 warning signs about Emirates Central Cooling Systems. View them for free.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Emirates Central Cooling Systems:

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

0.12 = د.إ1.1b ÷ (د.إ11b - د.إ1.9b) (Based on the trailing twelve months to December 2024).

Thus, Emirates Central Cooling Systems has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Water Utilities industry average of 7.9% it's much better.

View 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Emirates Central Cooling Systems .

The Trend Of ROCE

On the surface, the trend of ROCE at Emirates Central Cooling Systems doesn't inspire confidence. To be more specific, ROCE has fallen from 17% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

The Bottom Line On Emirates Central Cooling Systems' ROCE

To conclude, we've found that Emirates Central Cooling Systems is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 10% over the last year, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

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

While Emirates Central Cooling Systems 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.