Should We Be Excited About The Trends Of Returns At Aldrees Petroleum and Transport Services (TADAWUL:4200)?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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.

What is 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. To calculate this metric for Aldrees Petroleum and Transport Services, this is the formula:

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

0.059 = ر.س188m ÷ (ر.س4.5b - ر.س1.2b) (Based on the trailing twelve months to December 2020).

Thus, Aldrees Petroleum and Transport Services has an ROCE of 5.9%. In absolute terms, that's a low return but it's around the Oil and Gas industry average of 7.3%.

See 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, you can check out the forecasts from the analysts covering Aldrees Petroleum and Transport Services here for free.

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

In terms of Aldrees Petroleum and Transport Services' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 19%, but since then they've fallen to 5.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Aldrees Petroleum and Transport Services has decreased its current liabilities to 28% of total assets. That could partly explain why the ROCE has dropped. 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.

The Bottom Line On Aldrees Petroleum and Transport Services' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Aldrees Petroleum and Transport Services have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 213% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

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.

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