There Are Reasons To Feel Uneasy About Advanced Petrochemical's (TADAWUL:2330) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. In light of that, when we looked at Advanced Petrochemical (TADAWUL:2330) and its ROCE trend, we weren't exactly thrilled.

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

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

0.017 = ر.س184m ÷ (ر.س11b - ر.س577m) (Based on the trailing twelve months to March 2024).

Therefore, Advanced Petrochemical has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 6.7%.

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're interested, you can view the analysts predictions in our free analyst report for Advanced Petrochemical .

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

On the surface, the trend of ROCE at Advanced Petrochemical doesn't inspire confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 1.7%. 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.

On a side note, Advanced Petrochemical has done well to pay down its current liabilities to 5.1% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, we're somewhat concerned by Advanced Petrochemical's diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 1.8% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing: We've identified 4 warning signs with Advanced Petrochemical (at least 3 which are potentially serious) , and understanding these would certainly be useful.

While Advanced Petrochemical isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

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