Advanced Petrochemical (TADAWUL:2330) Will Be Looking To Turn Around Its Returns

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Advanced Petrochemical (TADAWUL:2330), we weren't too hopeful.

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. To calculate this metric for Advanced Petrochemical, this is the formula:

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

0.18 = ر.س631m ÷ (ر.س4.4b - ر.س947m) (Based on the trailing twelve months to March 2021).

Therefore, Advanced Petrochemical has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 6.8% it's much better.

View our latest analysis for Advanced Petrochemical

Above you can see how the current ROCE for Advanced Petrochemical 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 Advanced Petrochemical here for free.

What Can We Tell From Advanced Petrochemical's ROCE Trend?

We are a bit worried about the trend of returns on capital at Advanced Petrochemical. Unfortunately the returns on capital have diminished from the 23% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Advanced Petrochemical to turn into a multi-bagger.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 21%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Advanced Petrochemical's ROCE

In summary, it's unfortunate that Advanced Petrochemical is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 162%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Like most companies, Advanced Petrochemical does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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