Stock Analysis

Here's What's Concerning About Bin Dawood Holding's (TADAWUL:4161) Returns On Capital

SASE:4161
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Bin Dawood Holding (TADAWUL:4161) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Bin Dawood Holding:

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

0.076 = ر.س275m ÷ (ر.س4.6b - ر.س1.0b) (Based on the trailing twelve months to December 2021).

Therefore, Bin Dawood Holding has an ROCE of 7.6%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 13%.

View our latest analysis for Bin Dawood Holding

roce
SASE:4161 Return on Capital Employed April 29th 2022

Above you can see how the current ROCE for Bin Dawood Holding 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 Bin Dawood Holding.

So How Is Bin Dawood Holding's ROCE Trending?

On the surface, the trend of ROCE at Bin Dawood Holding doesn't inspire confidence. Over the last five years, returns on capital have decreased to 7.6% from 55% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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 side note, Bin Dawood Holding has done well to pay down its current liabilities to 22% of total assets. That could partly explain why the ROCE has dropped. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Bin Dawood Holding's ROCE

In summary, we're somewhat concerned by Bin Dawood Holding's diminishing returns on increasing amounts of capital. And long term shareholders have watched their investments stay flat over the last year. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Bin Dawood Holding does have some risks though, and we've spotted 3 warning signs for Bin Dawood Holding that you might be interested in.

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 helping make it simple.

Find out whether BinDawood Holding is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.