Investors Could Be Concerned With Dur Hospitality's (TADAWUL:4010) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Dur Hospitality (TADAWUL:4010), we don't think it's current trends fit the mold of a multi-bagger.

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 Dur Hospitality:

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

0.0019 = ر.س5.8m ÷ (ر.س3.5b - ر.س540m) (Based on the trailing twelve months to December 2020).

So, Dur Hospitality has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 3.6%.

Check out our latest analysis for Dur Hospitality

Historical performance is a great place to start when researching a stock so above you can see the gauge for Dur Hospitality's ROCE against it's prior returns. If you're interested in investigating Dur Hospitality's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Dur Hospitality doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.2% from 6.8% 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.

What We Can Learn From Dur Hospitality's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Dur Hospitality have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 46% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 2 warning signs for Dur Hospitality you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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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