Returns On Capital At Ataa Educational (TADAWUL:4292) Paint A Concerning Picture

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. 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. Analysts use this formula to calculate it for Ataa Educational:

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

0.045 = ر.س84m ÷ (ر.س2.2b - ر.س305m) (Based on the trailing twelve months to January 2023).

So, Ataa Educational has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 8.3%.

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

SWOT Analysis for Ataa Educational

How Are Returns Trending?

On the surface, the trend of ROCE at Ataa Educational doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 4.5%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From 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 119% to shareholders in the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 2 warning signs we've spotted with Ataa Educational (including 1 which can't be ignored) .

While Ataa Educational 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. 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.