Returns On Capital At Arabian Contracting Services (TADAWUL:4071) Paint A Concerning Picture
What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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.
What Is 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. The formula for this calculation on Arabian Contracting Services is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = ر.س517m ÷ (ر.س14b - ر.س3.7b) (Based on the trailing twelve months to September 2025).
Therefore, Arabian Contracting Services has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Media industry average of 7.6%.
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're interested, you can view the analysts predictions in our free analyst report for Arabian Contracting Services .
How Are Returns Trending?
We weren't thrilled with the trend because Arabian Contracting Services' ROCE has reduced by 60% over the last five years, while the business employed 1,149% more capital. That being said, Arabian Contracting Services raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Arabian Contracting Services probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
On a side note, Arabian Contracting Services has done well to pay down its current liabilities to 26% 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.
What We Can Learn From 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 36% to shareholders over the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Arabian Contracting Services (of which 1 can't be ignored!) that you should know about.
While Arabian Contracting Services 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.