Al-Babtain Power and Telecommunications (TADAWUL:2320) Is Very Good At Capital Allocation

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Al-Babtain Power and Telecommunications' (TADAWUL:2320) look very promising so lets take a look.

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Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Al-Babtain Power and Telecommunications, this is the formula:

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

0.29 = ر.س406m ÷ (ر.س3.0b - ر.س1.6b) (Based on the trailing twelve months to March 2025).

Thus, Al-Babtain Power and Telecommunications has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 8.5% earned by companies in a similar industry.

Check out our latest analysis for Al-Babtain Power and Telecommunications

Above you can see how the current ROCE for Al-Babtain Power and Telecommunications compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Al-Babtain Power and Telecommunications .

What Can We Tell From Al-Babtain Power and Telecommunications' ROCE Trend?

We like the trends that we're seeing from Al-Babtain Power and Telecommunications. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 29%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 41%. 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.

On a side note, Al-Babtain Power and Telecommunications' current liabilities are still rather high at 54% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Al-Babtain Power and Telecommunications' ROCE

In summary, it's great to see that Al-Babtain Power and Telecommunications can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Al-Babtain Power and Telecommunications can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Al-Babtain Power and Telecommunications, we've discovered 3 warning signs that you should be aware of.

Al-Babtain Power and Telecommunications is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.