Returns Are Gaining Momentum At Al Hassan Ghazi Ibrahim Shaker (TADAWUL:1214)

May 18, 2023

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at Al Hassan Ghazi Ibrahim Shaker (TADAWUL:1214) and its trend of ROCE, we really liked what we saw.

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 Al Hassan Ghazi Ibrahim Shaker:

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

0.059 = ر.س42m ÷ (ر.س1.6b - ر.س907m) (Based on the trailing twelve months to December 2022).

Thus, Al Hassan Ghazi Ibrahim Shaker has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 8.2%.

See our latest analysis for Al Hassan Ghazi Ibrahim Shaker

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.

SWOT Analysis for Al Hassan Ghazi Ibrahim Shaker

Strength

Debt is well covered by .

Balance sheet summary for 1214.

Weakness

Earnings growth over the past year underperformed the Trade Distributors industry.

Interest payments on debt are not well covered.

Expensive based on P/E ratio and estimated fair value.

Opportunity

Annual earnings are forecast to grow faster than the Saudi market.

Threat

Debt is not well covered by operating cash flow.

Is 1214 well equipped to handle threats?

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

It's great to see that Al Hassan Ghazi Ibrahim Shaker has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 5.9% which is no doubt a relief for some early shareholders. In regards to capital employed, Al Hassan Ghazi Ibrahim Shaker is using 29% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

On a side note, Al Hassan Ghazi Ibrahim Shaker's current liabilities are still rather high at 56% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Al Hassan Ghazi Ibrahim Shaker's ROCE

In summary, it's great to see that Al Hassan Ghazi Ibrahim Shaker has been able to turn things around and earn higher returns on lower amounts of capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 82% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 1 warning sign with Al Hassan Ghazi Ibrahim Shaker and understanding it should be part of your investment process.

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.