We Like These Underlying Return On Capital Trends At Arabian Drilling (TADAWUL:2381)

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at Arabian Drilling (TADAWUL:2381) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Arabian Drilling:

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

0.089 = ر.س843m ÷ (ر.س10b - ر.س1.0b) (Based on the trailing twelve months to June 2024).

So, Arabian Drilling has an ROCE of 8.9%. Even though it's in line with the industry average of 9.3%, it's still a low return by itself.

Check out our latest analysis for Arabian Drilling

Above you can see how the current ROCE for Arabian Drilling compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Arabian Drilling .

What Does the ROCE Trend For Arabian Drilling Tell Us?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.9%. The amount of capital employed has increased too, by 62%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Key Takeaway

To sum it up, Arabian Drilling has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Given the stock has declined 37% in the last year, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Arabian Drilling does have some risks though, and we've spotted 2 warning signs for Arabian Drilling that you might be interested in.

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.