Al-Omran Industrial Trading (TADAWUL:4141) Will Be Hoping To Turn Its Returns On Capital Around

What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Al-Omran Industrial Trading (TADAWUL:4141), so let's see why.

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. To calculate this metric for Al-Omran Industrial Trading, this is the formula:

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

0.071 = ر.س8.3m ÷ (ر.س190m - ر.س72m) (Based on the trailing twelve months to March 2021).

Thus, Al-Omran Industrial Trading has an ROCE of 7.1%. In absolute terms, that's a low return but it's around the Building industry average of 8.7%.

View our latest analysis for Al-Omran Industrial Trading

Historical performance is a great place to start when researching a stock so above you can see the gauge for Al-Omran Industrial Trading's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Al-Omran Industrial Trading, check out these free graphs here.

What Can We Tell From Al-Omran Industrial Trading's ROCE Trend?

We are a bit worried about the trend of returns on capital at Al-Omran Industrial Trading. About five years ago, returns on capital were 9.7%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Al-Omran Industrial Trading becoming one if things continue as they have.

On a side note, Al-Omran Industrial Trading's current liabilities have increased over the last five years to 38% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 7.1%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Al-Omran Industrial Trading's ROCE

In summary, it's unfortunate that Al-Omran Industrial Trading is generating lower returns from the same amount of capital. Since the stock has skyrocketed 719% over the last three years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to continue researching Al-Omran Industrial Trading, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade 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.