Returns On Capital Signal Tricky Times Ahead For Al-Dawaa Medical Services (TADAWUL:4163)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. However, after briefly looking over the numbers, we don't think Al-Dawaa Medical Services (TADAWUL:4163) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Al-Dawaa Medical Services is:

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

0.11 = ر.س315m ÷ (ر.س4.6b - ر.س1.6b) (Based on the trailing twelve months to September 2022).

So, Al-Dawaa Medical Services has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.

Check out our latest analysis for Al-Dawaa Medical Services

In the above chart we have measured Al-Dawaa Medical Services' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

SWOT Analysis for Al-Dawaa Medical Services

So How Is Al-Dawaa Medical Services' ROCE Trending?

On the surface, the trend of ROCE at Al-Dawaa Medical Services doesn't inspire confidence. Around four years ago the returns on capital were 18%, but since then they've fallen to 11%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Al-Dawaa Medical Services has done well to pay down its current liabilities to 35% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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 Al-Dawaa Medical Services' ROCE

In summary, Al-Dawaa Medical Services is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 0.3% to shareholders over the last year. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Al-Dawaa Medical Services does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Al-Dawaa Medical Services isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.