Returns On Capital Signal Difficult Times Ahead For Mesaieed Petrochemical Holding Company Q.P.S.C (DSM:MPHC)

When researching a stock for investment, what can tell us that the company is 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. This indicates the company is producing less profit from its investments and its total assets are decreasing. 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)?

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. 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)

0.04 = ر.ق636m ÷ (ر.ق16b - ر.ق324m) (Based on the trailing twelve months to December 2020).

So, Mesaieed Petrochemical Holding Company Q.P.S.C has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 9.2%.

Check out 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 past earnings, revenue and cash flow.

How Are Returns Trending?

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 7.0% 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. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Mesaieed Petrochemical Holding Company Q.P.S.C to turn into a multi-bagger.

Our Take 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 16% 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 more thing to note, we've identified 1 warning sign with Mesaieed Petrochemical Holding Company Q.P.S.C and understanding this should be part of your investment process.

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. 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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