Aldrees Petroleum and Transport Services (TADAWUL:4200) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Aldrees Petroleum and Transport Services (TADAWUL:4200), it didn't seem to tick all of these boxes.

What Is 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)

0.084 = ر.س324m ÷ (ر.س5.9b - ر.س2.0b) (Based on the trailing twelve months to June 2022).

Therefore, Aldrees Petroleum and Transport Services has an ROCE of 8.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.3%.

View our latest analysis for Aldrees Petroleum and Transport Services

Above you can see how the current ROCE for Aldrees Petroleum and Transport Services 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 report for Aldrees Petroleum and Transport Services.

So How Is Aldrees Petroleum and Transport Services' ROCE Trending?

When we looked at the ROCE trend at Aldrees Petroleum and Transport Services, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 8.4%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Aldrees Petroleum and Transport Services has decreased its current liabilities to 34% 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.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Aldrees Petroleum and Transport Services is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 372% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching Aldrees Petroleum and Transport Services, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Aldrees Petroleum and Transport Services may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.