Electrical Industries (TADAWUL:1303) Is Investing Its Capital With Increasing Efficiency

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Electrical Industries (TADAWUL:1303) looks great, so lets see what the trend can tell us.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Electrical Industries, this is the formula:

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

0.38 = ر.س368m ÷ (ر.س2.1b - ر.س1.1b) (Based on the trailing twelve months to June 2024).

So, Electrical Industries has an ROCE of 38%. In absolute terms that's a great return and it's even better than the Electrical industry average of 8.2%.

View 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'd like to look at how Electrical Industries has performed in the past in other metrics, you can view this free graph of Electrical Industries' past earnings, revenue and cash flow.

The Trend Of ROCE

The trends we've noticed at Electrical Industries are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 38%. The amount of capital employed has increased too, by 45%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 53% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line

All in all, it's terrific to see that Electrical Industries is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.

On a final note, we've found 1 warning sign for Electrical Industries that we think you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.