Mesaieed Petrochemical Holding Company Q.P.S.C (DSM:MPHC) Could Be Struggling To Allocate Capital

What underlying fundamental trends can indicate that a company might be 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. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Mesaieed Petrochemical Holding Company Q.P.S.C (DSM:MPHC), we've spotted some signs that it could be struggling, so let's investigate.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Mesaieed Petrochemical Holding Company Q.P.S.C, this is the formula:

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

0.062 = ر.ق1.0b ÷ (ر.ق17b - ر.ق442m) (Based on the trailing twelve months to March 2024).

Therefore, Mesaieed Petrochemical Holding Company Q.P.S.C has an ROCE of 6.2%. On its own, that's a low figure but it's around the 7.3% 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'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.

What Does the ROCE Trend For Mesaieed Petrochemical Holding Company Q.P.S.C Tell Us?

There is reason to be cautious about Mesaieed Petrochemical Holding Company Q.P.S.C, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 8.0% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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.

What We Can Learn From Mesaieed Petrochemical Holding Company Q.P.S.C's ROCE

In summary, it's unfortunate that Mesaieed Petrochemical Holding Company Q.P.S.C is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 22% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Mesaieed Petrochemical Holding Company Q.P.S.C does have some risks though, and we've spotted 2 warning signs for Mesaieed Petrochemical Holding Company Q.P.S.C that you might be interested in.

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.

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