These Metrics Don't Make Al-Babtain Power and Telecommunication (TADAWUL:2320) Look Too Strong

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Al-Babtain Power and Telecommunication (TADAWUL:2320), we weren't too hopeful.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Al-Babtain Power and Telecommunication, this is the formula:

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

0.11 = ر.س119m ÷ (ر.س2.2b - ر.س1.1b) (Based on the trailing twelve months to September 2020).

Therefore, Al-Babtain Power and Telecommunication has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Construction industry.

Check out 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

There is reason to be cautious about Al-Babtain Power and Telecommunication, given the returns are trending downwards. To be more specific, the ROCE was 14% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Al-Babtain Power and Telecommunication becoming one if things continue as they have.

On a side note, Al-Babtain Power and Telecommunication's current liabilities are still rather high at 49% 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.

Our Take On Al-Babtain Power and Telecommunication's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 13% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about Al-Babtain Power and Telecommunication, we've spotted 3 warning signs, and 2 of them make us uncomfortable.

While Al-Babtain Power and Telecommunication 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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