Returns At Arabian Plastic Industrial (TADAWUL:9548) Are On The Way Up

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Arabian Plastic Industrial's (TADAWUL:9548) returns on capital, so let's have a look.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Arabian Plastic Industrial is:

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

0.15 = ر.س14m ÷ (ر.س164m - ر.س69m) (Based on the trailing twelve months to June 2023).

Thus, Arabian Plastic Industrial has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Packaging industry average of 14%.

See our latest analysis for Arabian Plastic Industrial

Historical performance is a great place to start when researching a stock so above you can see the gauge for Arabian Plastic Industrial's ROCE against it's prior returns. If you're interested in investigating Arabian Plastic Industrial's past further, check out this free graph covering Arabian Plastic Industrial's past earnings, revenue and cash flow.

What Does the ROCE Trend For Arabian Plastic Industrial Tell Us?

Arabian Plastic Industrial has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last two years, the ROCE has climbed 55% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a side note, Arabian Plastic Industrial's current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Arabian Plastic Industrial's ROCE

In summary, we're delighted to see that Arabian Plastic Industrial has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 19% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Arabian Plastic Industrial can keep these trends up, it could have a bright future ahead.

On a final note, we've found 3 warning signs for Arabian Plastic Industrial that we think you should be aware of.

While Arabian Plastic Industrial 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com