Returns On Capital At Arabian Drilling (TADAWUL:2381) Have Stalled

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Arabian Drilling (TADAWUL:2381) 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. To calculate this metric for Arabian Drilling, this is the formula:

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

0.079 = ر.س726m ÷ (ر.س10b - ر.س912m) (Based on the trailing twelve months to September 2023).

So, Arabian Drilling has an ROCE of 7.9%. In absolute terms, that's a low return but it's around the Energy Services industry average of 7.3%.

Check out our latest analysis for Arabian Drilling

In the above chart we have measured Arabian Drilling's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Arabian Drilling for free.

What Can We Tell From Arabian Drilling's ROCE Trend?

In terms of Arabian Drilling's historical ROCE trend, it doesn't exactly demand attention. Over the past four years, ROCE has remained relatively flat at around 7.9% and the business has deployed 58% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

One more thing to note, even though ROCE has remained relatively flat over the last four years, the reduction in current liabilities to 9.0% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Arabian Drilling's ROCE

In summary, Arabian Drilling has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 27% over the last year. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Arabian Drilling does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

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.