Returns Are Gaining Momentum At Al Faleh Educational Holding (DSM:FALH)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Al Faleh Educational Holding's (DSM:FALH) 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. To calculate this metric for Al Faleh Educational Holding, this is the formula:

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

0.059 = ر.ق17m ÷ (ر.ق377m - ر.ق79m) (Based on the trailing twelve months to February 2023).

So, Al Faleh Educational Holding has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 8.3%.

See our latest analysis for Al Faleh Educational Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for Al Faleh Educational Holding's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Al Faleh Educational Holding, check out these free graphs here.

So How Is Al Faleh Educational Holding's ROCE Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 5.9%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 72%. So we're very much inspired by what we're seeing at Al Faleh Educational Holding thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 21%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line On Al Faleh Educational Holding's ROCE

To sum it up, Al Faleh Educational Holding has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 34% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing, we've spotted 2 warning signs facing Al Faleh Educational Holding that you might find interesting.

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

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

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.