Returns On Capital Signal Difficult Times Ahead For Al Hassan Ghazi Ibrahim Shaker (TADAWUL:1214)

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Al Hassan Ghazi Ibrahim Shaker (TADAWUL:1214), we've spotted some signs that it could be struggling, so let's investigate.

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 Hassan Ghazi Ibrahim Shaker, this is the formula:

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

0.011 = ر.س8.8m ÷ (ر.س1.6b - ر.س772m) (Based on the trailing twelve months to March 2021).

Therefore, Al Hassan Ghazi Ibrahim Shaker has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 6.4%.

See our latest analysis for Al Hassan Ghazi Ibrahim Shaker

In the above chart we have measured Al Hassan Ghazi Ibrahim Shaker's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Al Hassan Ghazi Ibrahim Shaker here for free.

The Trend Of ROCE

The trend of ROCE at Al Hassan Ghazi Ibrahim Shaker is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 1.1% we see today. In addition to that, Al Hassan Ghazi Ibrahim Shaker is now employing 35% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

Another thing to note, Al Hassan Ghazi Ibrahim Shaker has a high ratio of current liabilities to total assets of 50%. 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.

In Conclusion...

In summary, it's unfortunate that Al Hassan Ghazi Ibrahim Shaker is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 17% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Al Hassan Ghazi Ibrahim Shaker does have some risks though, and we've spotted 2 warning signs for Al Hassan Ghazi Ibrahim Shaker that you might be interested in.

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