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? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Aldrees Petroleum and Transport Services (TADAWUL:4200) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Aldrees Petroleum and Transport Services:

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

0.093 = ر.س417m ÷ (ر.س7.6b - ر.س3.1b) (Based on the trailing twelve months to June 2023).

So, Aldrees Petroleum and Transport Services has an ROCE of 9.3%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 12%.

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.

What Does the ROCE Trend For Aldrees Petroleum and Transport Services Tell Us?

On the surface, the trend of ROCE at Aldrees Petroleum and Transport Services doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 9.3%. 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 41% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 41% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From Aldrees Petroleum and Transport Services' ROCE

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 648% 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.

One more thing, we've spotted 3 warning signs facing Aldrees Petroleum and Transport Services that you might find interesting.

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.