Ataa Educational (TADAWUL:4292) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Ataa Educational (TADAWUL:4292), it didn't seem to tick all of these boxes.

What Is 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. The formula for this calculation on Ataa Educational is:

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

0.052 = ر.س95m ÷ (ر.س2.1b - ر.س321m) (Based on the trailing twelve months to April 2023).

Therefore, Ataa Educational has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 9.3%.

See our latest analysis for Ataa Educational

Above you can see how the current ROCE for Ataa Educational 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 Ataa Educational.

What Can We Tell From Ataa Educational's ROCE Trend?

On the surface, the trend of ROCE at Ataa Educational doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.2% from 11% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Ataa Educational's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Ataa Educational is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 107% to shareholders in the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Ataa Educational does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Ataa Educational 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.

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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.