Our Take On The Returns On Capital At Herfy Food Services (TADAWUL:6002)

If you're looking for a multi-bagger, there's a few things to 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Herfy Food Services (TADAWUL:6002), it didn't seem to tick all of these boxes.

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 Herfy Food Services:

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

0.073 = ر.س117m ÷ (ر.س2.0b - ر.س386m) (Based on the trailing twelve months to September 2020).

Therefore, Herfy Food Services has an ROCE of 7.3%. On its own that's a low return, but compared to the average of 3.3% generated by the Hospitality industry, it's much better.

Check out our latest analysis for Herfy Food Services

Above you can see how the current ROCE for Herfy Food Services compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Herfy Food Services' ROCE Trend?

When we looked at the ROCE trend at Herfy Food Services, we didn't gain much confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 7.3%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

Our Take On Herfy Food Services' ROCE

In summary, we're somewhat concerned by Herfy Food Services' diminishing returns on increasing amounts of capital. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing, we've spotted 1 warning sign facing Herfy Food Services that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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