Here's What's Concerning About Mesaieed Petrochemical Holding Company Q.P.S.C's (DSM:MPHC) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Mesaieed Petrochemical Holding Company Q.P.S.C (DSM:MPHC), we weren't too hopeful.

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

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 Mesaieed Petrochemical Holding Company Q.P.S.C:

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

0.063 = ر.ق1.1b ÷ (ر.ق18b - ر.ق455m) (Based on the trailing twelve months to December 2023).

Therefore, Mesaieed Petrochemical Holding Company Q.P.S.C has an ROCE of 6.3%. On its own, that's a low figure but it's around the 7.8% average generated by the Chemicals industry.

View our latest analysis for Mesaieed Petrochemical Holding Company 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 Mesaieed Petrochemical Holding Company Q.P.S.C has performed in the past in other metrics, you can view this free graph of Mesaieed Petrochemical Holding Company Q.P.S.C's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Mesaieed Petrochemical Holding Company Q.P.S.C, given the returns are trending downwards. To be more specific, the ROCE was 8.1% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Mesaieed Petrochemical Holding Company Q.P.S.C becoming one if things continue as they have.

The Bottom Line On Mesaieed Petrochemical Holding Company Q.P.S.C's ROCE

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 10.0% 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.

If you'd like to know more about Mesaieed Petrochemical Holding Company Q.P.S.C, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

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.

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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.