There Are Reasons To Feel Uneasy About AlMuneef Company for Trade Industry Agriculture and Contracting's (TADAWUL:9569) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Having said that, while the ROCE is currently high for AlMuneef Company for Trade Industry Agriculture and Contracting (TADAWUL:9569), we aren't jumping out of our chairs because returns are decreasing.

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Understanding 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 AlMuneef Company for Trade Industry Agriculture and Contracting:

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

0.21 = ر.س21m ÷ (ر.س112m - ر.س10m) (Based on the trailing twelve months to June 2024).

So, AlMuneef Company for Trade Industry Agriculture and Contracting has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.

See our latest analysis for AlMuneef Company for Trade Industry Agriculture and Contracting

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how AlMuneef Company for Trade Industry Agriculture and Contracting has performed in the past in other metrics, you can view this free graph of AlMuneef Company for Trade Industry Agriculture and Contracting's past earnings, revenue and cash flow.

What Can We Tell From AlMuneef Company for Trade Industry Agriculture and Contracting's ROCE Trend?

On the surface, the trend of ROCE at AlMuneef Company for Trade Industry Agriculture and Contracting doesn't inspire confidence. Historically returns on capital were even higher at 45%, but they have dropped over the last three years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, AlMuneef Company for Trade Industry Agriculture and Contracting has decreased its current liabilities to 9.2% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for AlMuneef Company for Trade Industry Agriculture and Contracting have fallen, meanwhile the business is employing more capital than it was three years ago. In spite of that, the stock has delivered a 3.5% return to shareholders who held over the last year. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we found 4 warning signs for AlMuneef Company for Trade Industry Agriculture and Contracting (2 don't sit too well with us) you should be aware of.

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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.