Returns On Capital Are Showing Encouraging Signs At Al Hassan Ghazi Ibrahim Shaker (TADAWUL:1214)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So when we looked at Al Hassan Ghazi Ibrahim Shaker (TADAWUL:1214) and its trend of ROCE, we really liked what we saw.

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. 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)

0.083 = ر.س61m ÷ (ر.س1.8b - ر.س1.1b) (Based on the trailing twelve months to June 2023).

Therefore, Al Hassan Ghazi Ibrahim Shaker has an ROCE of 8.3%. Even though it's in line with the industry average of 7.9%, it's still a low return by itself.

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.

So How Is Al Hassan Ghazi Ibrahim Shaker's ROCE Trending?

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 8.3% which is no doubt a relief for some early shareholders. 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 21%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

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 59%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

From what we've seen above, Al Hassan Ghazi Ibrahim Shaker has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a staggering 145% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Al Hassan Ghazi Ibrahim Shaker can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 1 warning sign for Al Hassan Ghazi Ibrahim Shaker you'll probably want to know about.

While Al Hassan Ghazi Ibrahim Shaker 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.