Stock Analysis

Be Wary Of Bin Dawood Holding (TADAWUL:4161) And Its Returns On Capital

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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Bin Dawood Holding (TADAWUL:4161) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Bin Dawood Holding is:

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

0.094 = ر.س354m ÷ (ر.س4.7b - ر.س957m) (Based on the trailing twelve months to June 2021).

So, Bin Dawood Holding has an ROCE of 9.4%. In absolute terms, that's a low return but it's around the Consumer Retailing industry average of 8.5%.

See our latest analysis for Bin Dawood Holding

SASE:4161 Return on Capital Employed October 21st 2021

In the above chart we have measured Bin Dawood Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Bin Dawood Holding here for free.

So How Is Bin Dawood Holding's ROCE Trending?

In terms of Bin Dawood Holding's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 9.4% from 47% four years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Bin Dawood Holding has decreased its current liabilities to 20% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

We're a bit apprehensive about Bin Dawood Holding because despite more capital being deployed in the business, returns on that capital and sales have both fallen. In spite of that, the stock has delivered a 3.6% return to shareholders who held over the last year. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to continue researching Bin Dawood Holding, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Bin Dawood Holding may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Valuation is complex, but we're here to simplify it.

Discover if BinDawood Holding might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.

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