Be Wary Of Al-Babtain Power and Telecommunication (TADAWUL:2320) And Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Al-Babtain Power and Telecommunication (TADAWUL:2320), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Al-Babtain Power and Telecommunication:

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

0.065 = ر.س94m ÷ (ر.س2.7b - ر.س1.2b) (Based on the trailing twelve months to March 2022).

Therefore, Al-Babtain Power and Telecommunication has an ROCE of 6.5%. In absolute terms, that's a low return but it's around the Construction industry average of 7.5%.

See our latest analysis for Al-Babtain Power and Telecommunication

Historical performance is a great place to start when researching a stock so above you can see the gauge for Al-Babtain Power and Telecommunication's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Al-Babtain Power and Telecommunication, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at Al-Babtain Power and Telecommunication, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 6.5% from 18% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Al-Babtain Power and Telecommunication's current liabilities are still rather high at 46% 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Al-Babtain Power and Telecommunication is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 13% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One final note, you should learn about the 6 warning signs we've spotted with Al-Babtain Power and Telecommunication (including 3 which don't sit too well with us) .

While Al-Babtain Power and Telecommunication may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.