Capital Allocation Trends At Estithmar Holding Q.P.S.C (DSM:IGRD) Aren't Ideal

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Estithmar Holding Q.P.S.C (DSM:IGRD) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Estithmar Holding Q.P.S.C:

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

0.073 = ر.ق407m ÷ (ر.ق8.7b - ر.ق3.2b) (Based on the trailing twelve months to December 2022).

So, Estithmar Holding Q.P.S.C has an ROCE of 7.3%. On its own, that's a low figure but it's around the 7.9% average generated by the Construction industry.

See 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'd like to look at how Estithmar Holding Q.P.S.C has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Estithmar Holding Q.P.S.C's ROCE Trend?

When we looked at the ROCE trend at Estithmar Holding Q.P.S.C, we didn't gain much confidence. Over the last one year, returns on capital have decreased to 7.3% from 25% one year 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.

On a side note, Estithmar Holding Q.P.S.C has done well to pay down its current liabilities to 36% of total assets. So we could link some of this to the decrease in ROCE. 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.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Estithmar Holding Q.P.S.C. These growth trends haven't led to growth returns though, since the stock has fallen 12% 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.

Estithmar Holding Q.P.S.C does have some risks, we noticed 4 warning signs (and 2 which can't be ignored) we think you should know about.

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.