Be Wary Of Thob Al Aseel (TADAWUL:4012) And Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Thob Al Aseel (TADAWUL:4012), it didn't seem to tick all of these boxes.

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

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. To calculate this metric for Thob Al Aseel, this is the formula:

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

0.17 = ر.س96m ÷ (ر.س658m - ر.س85m) (Based on the trailing twelve months to March 2021).

So, Thob Al Aseel has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 8.6% generated by the Luxury industry.

Check out our latest analysis for Thob Al Aseel

Historical performance is a great place to start when researching a stock so above you can see the gauge for Thob Al Aseel's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Thob Al Aseel, check out these free graphs here.

So How Is Thob Al Aseel's ROCE Trending?

On the surface, the trend of ROCE at Thob Al Aseel doesn't inspire confidence. Around five years ago the returns on capital were 37%, but since then they've fallen to 17%. 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. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Thob Al Aseel is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 205% return over the last three years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing: We've identified 2 warning signs with Thob Al Aseel (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

While Thob Al Aseel isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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