Be Wary Of Estithmar Holding Q.P.S.C (DSM:IGRD) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Estithmar Holding Q.P.S.C (DSM:IGRD) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Estithmar Holding Q.P.S.C is:

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

0.077 = ر.ق497m ÷ (ر.ق9.0b - ر.ق2.5b) (Based on the trailing twelve months to December 2023).

So, Estithmar Holding Q.P.S.C has an ROCE of 7.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.3%.

View our latest analysis for Estithmar Holding Q.P.S.C

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Estithmar Holding Q.P.S.C's past further, check out this free graph covering Estithmar Holding Q.P.S.C's past earnings, revenue and cash flow.

So How Is Estithmar Holding Q.P.S.C's ROCE Trending?

When we looked at the ROCE trend at Estithmar Holding Q.P.S.C, we didn't gain much confidence. To be more specific, ROCE has fallen from 25% over the last two years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Estithmar Holding Q.P.S.C has decreased its current liabilities to 28% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Estithmar Holding Q.P.S.C have fallen, meanwhile the business is employing more capital than it was two years ago. And, the stock has remained flat over the last year, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to continue researching Estithmar Holding Q.P.S.C, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Estithmar Holding Q.P.S.C 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.