How Has Industries Qatar Q.P.S.C (DSM:IQCD) Allocated Its Capital?

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Industries Qatar Q.P.S.C (DSM:IQCD), we weren't too hopeful.

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 Industries Qatar Q.P.S.C:

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

0.0058 = ر.ق197m ÷ (ر.ق35b - ر.ق1.4b) (Based on the trailing twelve months to September 2020).

So, Industries Qatar Q.P.S.C has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Industrials industry average of 5.4%.

See our latest analysis for Industries Qatar Q.P.S.C

In the above chart we have measured Industries Qatar Q.P.S.C's 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 Industries Qatar Q.P.S.C here for free.

What Does the ROCE Trend For Industries Qatar Q.P.S.C Tell Us?

In terms of Industries Qatar Q.P.S.C's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 2.8%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Industries Qatar Q.P.S.C to turn into a multi-bagger.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 17% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Industries Qatar Q.P.S.C (including 1 which is doesn't sit too well with us) .

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.

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