Slowing Rates Of Return At Abdullah Al-Othaim Markets (TADAWUL:4001) Leave Little Room For Excitement

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. That's why when we briefly looked at Abdullah Al-Othaim Markets' (TADAWUL:4001) ROCE trend, we were pretty happy with what we saw.

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. To calculate this metric for Abdullah Al-Othaim Markets, this is the formula:

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

0.12 = ر.س348m ÷ (ر.س5.1b - ر.س2.1b) (Based on the trailing twelve months to December 2021).

Thus, Abdullah Al-Othaim Markets has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 13% generated by the Consumer Retailing industry.

See our latest analysis for Abdullah Al-Othaim Markets

In the above chart we have measured Abdullah Al-Othaim Markets' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Abdullah Al-Othaim Markets.

What Can We Tell From Abdullah Al-Othaim Markets' ROCE Trend?

While the returns on capital are good, they haven't moved much. The company has employed 70% more capital in the last five years, and the returns on that capital have remained stable at 12%. 12% is a pretty standard return, and it provides some comfort knowing that Abdullah Al-Othaim Markets has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a separate but related note, it's important to know that Abdullah Al-Othaim Markets has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

The main thing to remember is that Abdullah Al-Othaim Markets has proven its ability to continually reinvest at respectable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 164% return to those who've held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

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.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.