Capital Allocation Trends At Advanced Petrochemical (TADAWUL:2330) Aren't Ideal

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Advanced Petrochemical (TADAWUL:2330), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Advanced Petrochemical:

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

0.023 = ر.س257m ÷ (ر.س11b - ر.س404m) (Based on the trailing twelve months to September 2023).

Thus, Advanced Petrochemical has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 5.6%.

See 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 to see what analysts are forecasting going forward, you should check out our free report for Advanced Petrochemical.

So How Is Advanced Petrochemical's ROCE Trending?

When we looked at the ROCE trend at Advanced Petrochemical, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.3% from 15% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Advanced Petrochemical's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Advanced Petrochemical have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 22% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Advanced Petrochemical does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those are significant...

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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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.