Aldrees Petroleum and Transport Services (TADAWUL:4200) Could Be Struggling To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Aldrees Petroleum and Transport Services (TADAWUL:4200), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Aldrees Petroleum and Transport Services is:

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

0.057 = ر.س200m ÷ (ر.س5.1b - ر.س1.6b) (Based on the trailing twelve months to March 2021).

Thus, Aldrees Petroleum and Transport Services has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 8.0%.

See our latest analysis for Aldrees Petroleum and Transport Services

In the above chart we have measured Aldrees Petroleum and Transport Services' 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 report on analyst forecasts for the company.

What Can We Tell From Aldrees Petroleum and Transport Services' ROCE Trend?

When we looked at the ROCE trend at Aldrees Petroleum and Transport Services, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.7% from 20% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Aldrees Petroleum and Transport Services has done well to pay down its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, Aldrees Petroleum and Transport Services is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 336% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know more about Aldrees Petroleum and Transport Services, we've spotted 2 warning signs, and 1 of them is a bit concerning.

While Aldrees Petroleum and Transport Services 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. 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.
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