Here's What To Make Of Advanced Petrochemical's (TADAWUL:2330) Decelerating Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Advanced Petrochemical (TADAWUL:2330) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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 Advanced Petrochemical is:

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

0.20 = ر.س853m ÷ (ر.س5.6b - ر.س1.2b) (Based on the trailing twelve months to September 2021).

Thus, Advanced Petrochemical has an ROCE of 20%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 9.2% it's much better.

See our latest analysis for Advanced Petrochemical

Historical performance is a great place to start when researching a stock so above you can see the gauge for Advanced Petrochemical's ROCE against it's prior returns. If you'd like to look at how Advanced Petrochemical has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Advanced Petrochemical's ROCE Trending?

Over the past five years, Advanced Petrochemical's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Advanced Petrochemical doesn't end up being a multi-bagger in a few years time.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 22% of total assets, this reported ROCE would probably be less than20% because total capital employed would be higher.The 20% ROCE could be even lower if current liabilities weren't 22% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

The Bottom Line On Advanced Petrochemical's ROCE

We can conclude that in regards to Advanced Petrochemical's returns on capital employed and the trends, there isn't much change to report on. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 117% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Advanced Petrochemical does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Advanced Petrochemical 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.