Capital Allocation Trends At Thob Al Aseel (TADAWUL:4012) Aren't Ideal

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Thob Al Aseel (TADAWUL:4012), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Thob Al Aseel is:

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

0.14 = ر.س84m ÷ (ر.س718m - ر.س130m) (Based on the trailing twelve months to March 2022).

Therefore, Thob Al Aseel has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 11% it's much better.

View 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.

What Can We Tell From Thob Al Aseel's ROCE Trend?

In terms of Thob Al Aseel's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 14% from 26% five years ago. However it looks like Thob Al Aseel might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Thob Al Aseel's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 72% over the last five years, 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.

If you'd like to know more about Thob Al Aseel, we've spotted 2 warning signs, and 1 of them is potentially serious.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.