Tam Development (TADAWUL:9570) Might Become A Compounding Machine

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So, when we ran our eye over Tam Development's (TADAWUL:9570) trend of ROCE, we really liked what we saw.

What Is 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 Tam Development:

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

0.37 = ر.س50m ÷ (ر.س213m - ر.س78m) (Based on the trailing twelve months to June 2024).

Therefore, Tam Development has an ROCE of 37%. That's a fantastic return and not only that, it outpaces the average of 20% earned by companies in a similar industry.

View our latest analysis for Tam Development

Above you can see how the current ROCE for Tam Development compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Tam Development .

The Trend Of ROCE

In terms of Tam Development's history of ROCE, it's quite impressive. The company has consistently earned 37% for the last three years, and the capital employed within the business has risen 234% in that time. Now considering ROCE is an attractive 37%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

In Conclusion...

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. Yet over the last year the stock has declined 22%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Tam Development (of which 1 is potentially serious!) that you should 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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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.