Maharah for Human Resources (TADAWUL:1831) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Looking at Maharah for Human Resources (TADAWUL:1831), it does have a high ROCE right now, but lets see how returns are trending.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Maharah for Human Resources:

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

0.29 = ر.س183m ÷ (ر.س1.0b - ر.س389m) (Based on the trailing twelve months to December 2020).

Thus, Maharah for Human Resources has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Professional Services industry average of 13%.

View our latest analysis for Maharah for Human Resources

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

The Trend Of ROCE

In terms of Maharah for Human Resources' historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 57%, but they have dropped over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Maharah for Human Resources is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 34% over the last year, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 2 warning signs for Maharah for Human Resources you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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