Investors Could Be Concerned With Arabian Contracting Services' (TADAWUL:4071) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Arabian Contracting Services (TADAWUL:4071), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Arabian Contracting Services:

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

0.14 = ر.س482m ÷ (ر.س4.9b - ر.س1.6b) (Based on the trailing twelve months to June 2024).

So, Arabian Contracting Services has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Media industry average of 7.3% it's much better.

See our latest analysis for Arabian Contracting Services

In the above chart we have measured Arabian Contracting Services' 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 Arabian Contracting Services for free.

What Does the ROCE Trend For Arabian Contracting Services Tell Us?

On the surface, the trend of ROCE at Arabian Contracting Services doesn't inspire confidence. Over the last five years, returns on capital have decreased to 14% from 31% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Arabian Contracting Services' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Arabian Contracting Services is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 9.6% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified 1 warning sign with Arabian Contracting Services and understanding it should be part of your investment process.

While Arabian Contracting Services 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.