Be Wary Of Aldrees Petroleum and Transport Services (TADAWUL:4200) And Its Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.075 = ر.س269m ÷ (ر.س5.4b - ر.س1.8b) (Based on the trailing twelve months to September 2021).

Therefore, Aldrees Petroleum and Transport Services has an ROCE of 7.5%. In absolute terms, that's a low return, but it's much better than the Oil and Gas industry average of 3.9%.

View 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'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?

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 7.5% from 17% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. 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 33% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On 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 419% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Aldrees Petroleum and Transport Services, we've discovered 2 warning signs that you should be aware of.

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.

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 (at) simplywallst.com.