Here's What's Concerning About Al-Samaani Factory For Metal Industries' (TADAWUL:1832) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. However, after briefly looking over the numbers, we don't think Al-Samaani Factory For Metal Industries (TADAWUL:1832) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Al-Samaani Factory For Metal Industries, this is the formula:

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

0.096 = ر.س4.7m ÷ (ر.س66m - ر.س17m) (Based on the trailing twelve months to March 2021).

Thus, Al-Samaani Factory For Metal Industries has an ROCE of 9.6%. On its own, that's a low figure but it's around the 8.4% average generated by the Commercial Services industry.

Check out our latest analysis for Al-Samaani Factory For Metal Industries

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

So How Is Al-Samaani Factory For Metal Industries' ROCE Trending?

In terms of Al-Samaani Factory For Metal Industries' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.6% from 45% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Al-Samaani Factory For Metal Industries has done well to pay down its current liabilities to 25% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Al-Samaani Factory For Metal Industries' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Al-Samaani Factory For Metal Industries. And the stock has done incredibly well with a 617% return over the last three years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Al-Samaani Factory For Metal Industries does have some risks though, and we've spotted 2 warning signs for Al-Samaani Factory For Metal Industries that you might be interested in.

While Al-Samaani Factory For Metal Industries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.