Al Hassan Ghazi Ibrahim Shaker (TADAWUL:1214) Might Have The Makings Of A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. With that in mind, we've noticed some promising trends at Al Hassan Ghazi Ibrahim Shaker (TADAWUL:1214) so let's look a bit deeper.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Al Hassan Ghazi Ibrahim Shaker, this is the formula:

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

0.065 = ر.س49m ÷ (ر.س1.7b - ر.س939m) (Based on the trailing twelve months to June 2022).

Thus, Al Hassan Ghazi Ibrahim Shaker has an ROCE of 6.5%. On its own, that's a low figure but it's around the 7.8% average generated by the Trade Distributors industry.

Check out the opportunities and risks within the XX Trade Distributors industry.

Above you can see how the current ROCE for Al Hassan Ghazi Ibrahim Shaker compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Al Hassan Ghazi Ibrahim Shaker.

What Does the ROCE Trend For Al Hassan Ghazi Ibrahim Shaker Tell Us?

We're delighted to see that Al Hassan Ghazi Ibrahim Shaker is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 32%. This could potentially mean that the company is selling some of its assets.

On a separate but related note, it's important to know that Al Hassan Ghazi Ibrahim Shaker has a current liabilities to total assets ratio of 55%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In a nutshell, we're pleased to see that Al Hassan Ghazi Ibrahim Shaker has been able to generate higher returns from less capital. Since the stock has returned a solid 47% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Al Hassan Ghazi Ibrahim Shaker does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

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.