Here's What's Concerning About Nahdi Medical's (TADAWUL:4164) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Looking at Nahdi Medical (TADAWUL:4164), it does have a high ROCE right now, but lets see how returns are trending.

What Is 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. The formula for this calculation on Nahdi Medical is:

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

0.30 = ر.س999m ÷ (ر.س5.7b - ر.س2.3b) (Based on the trailing twelve months to March 2023).

Thus, Nahdi Medical has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Consumer Retailing industry average of 15%.

See our latest analysis for Nahdi Medical

In the above chart we have measured Nahdi Medical's 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 Nahdi Medical.

What Does the ROCE Trend For Nahdi Medical Tell Us?

In terms of Nahdi Medical's historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 42%, but they have dropped over the last five years. However it looks like Nahdi Medical might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, Nahdi Medical has a high ratio of current liabilities to total assets of 41%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Nahdi Medical's ROCE

To conclude, we've found that Nahdi Medical is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 3.6% to shareholders over the last year. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Nahdi Medical does have some risks though, and we've spotted 1 warning sign for Nahdi Medical that you might be interested in.

Nahdi Medical is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.