The Returns On Capital At Gas Arabian Services (TADAWUL:9528) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)

0.15 = ر.س52m ÷ (ر.س540m - ر.س185m) (Based on the trailing twelve months to June 2023).

Therefore, Gas Arabian Services has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Machinery industry.

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'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.

How Are Returns Trending?

When we looked at the ROCE trend at Gas Arabian Services, we didn't gain much confidence. Around three years ago the returns on capital were 22%, but since then they've fallen to 15%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

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 51% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Gas Arabian Services does have some risks, we noticed 4 warning signs (and 3 which are a bit concerning) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.