EMSTEEL Building Materials PJSC (ADX:EMSTEEL) Will Be Hoping To Turn Its Returns On Capital Around

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at EMSTEEL Building Materials PJSC (ADX:EMSTEEL), it didn’t seem to tick all of these boxes.

We’ve discovered 2 warning signs about EMSTEEL Building Materials PJSC. View them for free.

What Is 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 EMSTEEL Building Materials PJSC:

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

0.032 = د.إ291m ÷ (د.إ11b – د.إ2.0b) (Based on the trailing twelve months to December 2024).

So, EMSTEEL Building Materials PJSC has an ROCE of 3.2%. On its own that’s a low return on capital but it’s in line with the industry’s average returns of 3.1%.

See our latest analysis for EMSTEEL Building Materials PJSC

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of EMSTEEL Building Materials PJSC.

How Are Returns Trending?

On the surface, the trend of ROCE at EMSTEEL Building Materials PJSC doesn’t inspire confidence. To be more specific, ROCE has fallen from 4.4% over the last five years. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It’s worth keeping an eye on the company’s earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, EMSTEEL Building Materials PJSC has done well to pay down its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. What’s more, this can reduce some aspects of risk to the business because now the company’s suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business’ efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

To conclude, we’ve found that EMSTEEL Building Materials PJSC is reinvesting in the business, but returns have been falling. Investors must think there’s better things to come because the stock has knocked it out of the park, delivering a 143% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.

Like most companies, EMSTEEL Building Materials PJSC does come with some risks, and we’ve found 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.