Slowing Rates Of Return At Arabian Drilling (TADAWUL:2381) Leave Little Room For Excitement

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Arabian Drilling (TADAWUL:2381) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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).

Thus, Arabian Drilling has an ROCE of 7.9%. On its own, that's a low figure but it's around the 7.2% average generated by the Energy Services industry.

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 to see what analysts are forecasting going forward, you should check out our free report for Arabian Drilling.

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. The company has consistently earned 7.9% for the last four years, and the capital employed within the business has risen 58% in that time. 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.

On a side note, Arabian Drilling has done well to reduce current liabilities to 9.0% of total assets over the last four years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Arabian Drilling's ROCE

As we've seen above, Arabian Drilling's returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 51% over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we found 2 warning signs for Arabian Drilling (1 can't be ignored) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.