Capital Allocation Trends At Mesaieed Petrochemical Holding Company Q.P.S.C (DSM:MPHC) Aren't Ideal

When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Mesaieed Petrochemical Holding Company Q.P.S.C (DSM:MPHC) we aren't filled with optimism, but let's investigate further.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Mesaieed Petrochemical Holding Company Q.P.S.C is:

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

0.044 = ر.ق719m ÷ (ر.ق17b - ر.ق343m) (Based on the trailing twelve months to December 2024).

So, Mesaieed Petrochemical Holding Company Q.P.S.C has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 7.8%.

See our latest analysis for Mesaieed Petrochemical Holding Company Q.P.S.C

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mesaieed Petrochemical Holding Company Q.P.S.C's ROCE against it's prior returns. If you're interested in investigating Mesaieed Petrochemical Holding Company Q.P.S.C's past further, check out this free graph covering Mesaieed Petrochemical Holding Company Q.P.S.C's past earnings, revenue and cash flow.

So How Is Mesaieed Petrochemical Holding Company Q.P.S.C's ROCE Trending?

In terms of Mesaieed Petrochemical Holding Company Q.P.S.C's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 13% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Mesaieed Petrochemical Holding Company Q.P.S.C to turn into a multi-bagger.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. 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.

On a separate note, we've found 2 warning signs for Mesaieed Petrochemical Holding Company Q.P.S.C you'll probably want to know about.

While Mesaieed Petrochemical Holding Company Q.P.S.C isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.