Al Khaleej Training and Education (TADAWUL:4290) Could Be Struggling To Allocate Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Al Khaleej Training and Education (TADAWUL:4290) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Al Khaleej Training and Education:

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

0.045 = ر.س61m ÷ (ر.س1.7b - ر.س372m) (Based on the trailing twelve months to September 2020).

Therefore, Al Khaleej Training and Education has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 8.0%.

Check out our latest analysis for Al Khaleej Training and Education

Above you can see how the current ROCE for Al Khaleej Training and Education compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Al Khaleej Training and Education here for free.

What Can We Tell From Al Khaleej Training and Education's ROCE Trend?

On the surface, the trend of ROCE at Al Khaleej Training and Education doesn't inspire confidence. To be more specific, ROCE has fallen from 11% over the last five years. However it looks like Al Khaleej Training and Education 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Al Khaleej Training and Education's ROCE

Bringing it all together, while we're somewhat encouraged by Al Khaleej Training and Education's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 6.4% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Al Khaleej Training and Education does have some risks though, and we've spotted 2 warning signs for Al Khaleej Training and Education that you might be interested in.

While Al Khaleej Training and Education 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. 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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