Returns On Capital At Thob Al Aseel (TADAWUL:4012) Paint An Interesting Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Having said that, while the ROCE is currently high for Thob Al Aseel (TADAWUL:4012), we aren't jumping out of our chairs because returns are decreasing.

Understanding Return On Capital Employed (ROCE)

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. 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)

0.22 = ر.س121m ÷ (ر.س626m - ر.س75m) (Based on the trailing twelve months to September 2020).

Therefore, Thob Al Aseel has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Luxury industry average of 8.5%.

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.

How Are Returns Trending?

On the surface, the trend of ROCE at Thob Al Aseel doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 38%. 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.

The Key Takeaway

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 long term investors must be optimistic going forward because the stock has returned a huge 234% to shareholders in the last three years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Thob Al Aseel (of which 2 don't sit too well with us!) that you should know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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