Some Investors May Be Worried About Emirates Central Cooling Systems' (DFM:EMPOWER) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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.

Understanding Return On Capital Employed (ROCE)

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 June 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 7.4% 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?

On the surface, the trend of ROCE at Emirates Central Cooling Systems doesn't inspire confidence. Over the last four years, returns on capital have decreased to 12% from 16% four years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Emirates Central Cooling Systems' 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 Emirates Central Cooling Systems. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing to note, we've identified 2 warning signs with Emirates Central Cooling Systems and understanding these should be part of your investment process.

While Emirates Central Cooling Systems isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.