Here’s What’s Happening With Returns At Middle East Specialized Cables (TADAWUL:2370)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Middle East Specialized Cables (TADAWUL:2370) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Middle East Specialized Cables is:

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

0.021 = ر.س10m ÷ (ر.س693m - ر.س208m) (Based on the trailing twelve months to September 2020).

So, Middle East Specialized Cables has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 7.9%.

Check out our latest analysis for Middle East Specialized Cables

Historical performance is a great place to start when researching a stock so above you can see the gauge for Middle East Specialized Cables' ROCE against it's prior returns. If you'd like to look at how Middle East Specialized Cables has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Middle East Specialized Cables' ROCE Trending?

Like most people, we're pleased that Middle East Specialized Cables is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 2.1% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 37%. Middle East Specialized Cables could be selling under-performing assets since the ROCE is improving.

One more thing to note, Middle East Specialized Cables has decreased current liabilities to 30% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line

In a nutshell, we're pleased to see that Middle East Specialized Cables has been able to generate higher returns from less capital. Considering the stock has delivered 37% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a final note, we've found 1 warning sign for Middle East Specialized Cables 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.

When trading Middle East Specialized Cables or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.