Ataa Educational (TADAWUL:4292) Will Be Hoping To Turn Its Returns On Capital Around

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Ataa Educational (TADAWUL:4292) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Ataa Educational, this is the formula:

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

0.044 = ر.س77m ÷ (ر.س2.0b - ر.س253m) (Based on the trailing twelve months to April 2022).

So, Ataa Educational has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 7.5%.

See our latest analysis for Ataa Educational

In the above chart we have measured Ataa Educational'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 Ataa Educational.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Ataa Educational doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. 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 the stock has followed suit returning a meaningful 15% to shareholders over the last year. 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 shouldn't be ignored...

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.