Capital Allocation Trends At National Building and Marketing (TADAWUL:9510) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at National Building and Marketing (TADAWUL:9510), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for National Building and Marketing:

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

0.14 = ر.س31m ÷ (ر.س543m - ر.س326m) (Based on the trailing twelve months to June 2021).

Therefore, National Building and Marketing has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Trade Distributors industry average of 7.1% it's much better.

See our latest analysis for National Building and Marketing

Historical performance is a great place to start when researching a stock so above you can see the gauge for National Building and Marketing's ROCE against it's prior returns. If you're interested in investigating National Building and Marketing's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For National Building and Marketing Tell Us?

In terms of National Building and Marketing's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 56% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, National Building and Marketing has decreased its current liabilities to 60% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 60% is still pretty high, so those risks are still somewhat prevalent.

Our Take On National Building and Marketing's ROCE

While returns have fallen for National Building and Marketing in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 17% over the last year, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to know some of the risks facing National Building and Marketing we've found 4 warning signs (3 are potentially serious!) that you should be aware of before investing here.

While National Building and Marketing isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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