Is Advanced Petrochemical (TADAWUL:2330) Using Capital Effectively?

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Advanced Petrochemical (TADAWUL:2330), the trends above didn't look too great.

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)

0.18 = ر.س589m ÷ (ر.س3.8b - ر.س475m) (Based on the trailing twelve months to September 2020).

Therefore, Advanced Petrochemical has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 7.5% 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.

How Are Returns Trending?

In terms of Advanced Petrochemical's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 23%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Advanced Petrochemical to turn into a multi-bagger.

Our Take On Advanced Petrochemical's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these poor fundamentals, the stock has gained a huge 205% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Advanced Petrochemical does have some risks though, and we've spotted 1 warning sign for Advanced Petrochemical that you might be interested in.

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