Returns On Capital At Gas Arabian Services (TADAWUL:9528) Paint A Concerning Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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.

Understanding 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 Gas Arabian Services, this is the formula:

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

0.11 = ر.س45m ÷ (ر.س586m - ر.س184m) (Based on the trailing twelve months to December 2023).

Therefore, Gas Arabian Services has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 7.9% it's much better.

View our latest analysis for Gas Arabian Services

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gas Arabian Services' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Gas Arabian Services.

What Does the ROCE Trend For Gas Arabian Services Tell Us?

When we looked at the ROCE trend at Gas Arabian Services, we didn't gain much confidence. To be more specific, ROCE has fallen from 19% over the last four years. 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.

The Bottom Line On Gas Arabian Services' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Gas Arabian Services. And the stock has followed suit returning a meaningful 52% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know more about Gas Arabian Services, we've spotted 2 warning signs, and 1 of them can't be ignored.

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.

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