Returns On Capital At Advanced Petrochemical (TADAWUL:2330) Have Stalled

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. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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?

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. Analysts use this formula to calculate it for Advanced Petrochemical:

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

0.17 = ر.س592m ÷ (ر.س4.0b - ر.س397m) (Based on the trailing twelve months to December 2020).

So, Advanced Petrochemical has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 4.8% generated by the Chemicals industry.

See our latest analysis for Advanced Petrochemical

In the above chart we have measured Advanced Petrochemical's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Advanced Petrochemical here for free.

What Does the ROCE Trend For Advanced Petrochemical Tell Us?

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 unless we see a substantial change at Advanced Petrochemical in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. That probably explains why Advanced Petrochemical has been paying out 78% of its earnings as dividends to shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.

The Bottom Line

In a nutshell, Advanced Petrochemical has been trudging along with the same returns from the same amount of capital over the last five years. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 192% 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.

If you'd like to know about the risks facing Advanced Petrochemical, we've discovered 1 warning sign that you should be aware of.

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