What These Trends Mean At Al-Babtain Power and Telecommunication (TADAWUL:2320)

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Al-Babtain Power and Telecommunication (TADAWUL:2320), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Al-Babtain Power and Telecommunication is:

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).

So, Al-Babtain Power and Telecommunication has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 8.7% it's much better.

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.

What Does the ROCE Trend For Al-Babtain Power and Telecommunication Tell Us?

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. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. 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.

Another thing to note, Al-Babtain Power and Telecommunication has a high ratio of current liabilities to total assets of 49%. 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.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. However the stock has delivered a 73% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we found 3 warning signs for Al-Babtain Power and Telecommunication (2 are a bit unpleasant) you should be aware of.

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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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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