Gas Arabian Services (TADAWUL:9528) Is Reinvesting At Lower Rates Of Return

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Gas Arabian Services (TADAWUL:9528) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Gas Arabian Services:

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

0.17 = ر.س71m ÷ (ر.س688m - ر.س282m) (Based on the trailing twelve months to June 2024).

So, Gas Arabian Services has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Trade Distributors industry average of 16%.

See our latest analysis for Gas Arabian Services

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 Gas Arabian Services has performed in the past in other metrics, you can view this free graph of Gas Arabian Services' past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Gas Arabian Services, we didn't gain much confidence. Around four years ago the returns on capital were 22%, but since then they've fallen to 17%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Gas Arabian Services' current liabilities are still rather high at 41% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Gas Arabian Services' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Gas Arabian Services is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 117% to shareholders in the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching Gas Arabian Services, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Gas Arabian Services 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.