Electrical Industries (TADAWUL:1303) Is Finding It Tricky To Allocate Its Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Electrical Industries (TADAWUL:1303), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Electrical Industries:

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

0.062 = ر.س42m ÷ (ر.س1.1b - ر.س414m) (Based on the trailing twelve months to December 2020).

So, Electrical Industries has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 8.2%.

See our latest analysis for Electrical Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Electrical Industries' ROCE against it's prior returns. If you're interested in investigating Electrical Industries' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Electrical Industries Tell Us?

There is reason to be cautious about Electrical Industries, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 9.4% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Electrical Industries to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Electrical Industries is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 20% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to continue researching Electrical Industries, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Electrical Industries 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. 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.
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