Al-Babtain Power and Telecommunications (TADAWUL:2320) Might Have The Makings Of A Multi-Bagger

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Al-Babtain Power and Telecommunications (TADAWUL:2320) so let's look a bit deeper.

What Is 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. Analysts use this formula to calculate it for Al-Babtain Power and Telecommunications:

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

0.18 = ر.س246m ÷ (ر.س3.0b - ر.س1.6b) (Based on the trailing twelve months to September 2023).

So, Al-Babtain Power and Telecommunications has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 8.0% generated by the Construction industry.

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

In the above chart we have measured Al-Babtain Power and Telecommunications' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

Investors would be pleased with what's happening at Al-Babtain Power and Telecommunications. Over the last five years, returns on capital employed have risen substantially to 18%. The amount of capital employed has increased too, by 35%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

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. Essentially the business now has suppliers or short-term creditors funding about 54% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Al-Babtain Power and Telecommunications' ROCE

To sum it up, Al-Babtain Power and Telecommunications has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 172% total return over the last five years tells us that investors are expecting more good things to come in the future. 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 Al-Babtain Power and Telecommunications that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.