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

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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)

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 Arabian Drilling, this is the formula:

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

0.087 = ر.س843m ÷ (ر.س11b - ر.س980m) (Based on the trailing twelve months to March 2024).

Therefore, Arabian Drilling has an ROCE of 8.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.5%.

See 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're interested, you can view the analysts predictions in our free analyst report for Arabian Drilling .

So How Is Arabian Drilling's ROCE Trending?

In terms of Arabian Drilling's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.7% for the last five years, and the capital employed within the business has risen 67% 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 9.2% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line On Arabian Drilling's ROCE

In conclusion, Arabian Drilling has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has declined 15% over the last year, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know about the risks facing Arabian Drilling, we've discovered 1 warning sign that you should be aware of.

While Arabian Drilling 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