Returns On Capital - An Important Metric For Abdullah Al-Othaim Markets (TADAWUL:4001)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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 looked at Abdullah Al-Othaim Markets (TADAWUL:4001) and its trend of ROCE, we really liked what we saw.

What is 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. Analysts use this formula to calculate it for Abdullah Al-Othaim Markets:

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

0.18 = ر.س500m ÷ (ر.س4.9b - ر.س2.2b) (Based on the trailing twelve months to September 2020).

Thus, Abdullah Al-Othaim Markets has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Consumer Retailing industry average of 9.2% it's much better.

View our latest analysis for Abdullah Al-Othaim Markets

Above you can see how the current ROCE for Abdullah Al-Othaim Markets 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 report for Abdullah Al-Othaim Markets.

The Trend Of ROCE

Abdullah Al-Othaim Markets is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 89% more capital is being employed now too. So we're very much inspired by what we're seeing at Abdullah Al-Othaim Markets thanks to its ability to profitably reinvest capital.

Another thing to note, Abdullah Al-Othaim Markets has a high ratio of current liabilities to total assets of 44%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Abdullah Al-Othaim Markets' ROCE

In summary, it's great to see that Abdullah Al-Othaim Markets can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 281% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing Abdullah Al-Othaim Markets, we've discovered 1 warning sign that you should be aware of.

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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This article by Simply Wall St is general in nature. 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.
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