These Return Metrics Don't Make Al Abdullatif Industrial Investment (TADAWUL:2340) Look Too Strong

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Al Abdullatif Industrial Investment (TADAWUL:2340), so let's see why.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Al Abdullatif Industrial Investment is:

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

0.003 = ر.س3.5m ÷ (ر.س1.3b - ر.س119m) (Based on the trailing twelve months to March 2021).

Therefore, Al Abdullatif Industrial Investment has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 11%.

Check out our latest analysis for Al Abdullatif Industrial Investment

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

What Can We Tell From Al Abdullatif Industrial Investment's ROCE Trend?

In terms of Al Abdullatif Industrial Investment's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 11% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Al Abdullatif Industrial Investment becoming one if things continue as they have.

On a side note, Al Abdullatif Industrial Investment has done well to pay down its current liabilities to 9.3% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, it's unfortunate that Al Abdullatif Industrial Investment is generating lower returns from the same amount of capital. Since the stock has skyrocketed 145% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Al Abdullatif Industrial Investment (including 1 which is significant) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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