Some Investors May Be Worried About Shatirah House Restaurant's (TADAWUL:6016) Returns On Capital

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after briefly looking over the numbers, we don't think Shatirah House Restaurant (TADAWUL:6016) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Shatirah House Restaurant, this is the formula:

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

0.18 = ر.س18m ÷ (ر.س148m - ر.س48m) (Based on the trailing twelve months to June 2024).

Thus, Shatirah House Restaurant has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 8.6% generated by the Hospitality industry.

See our latest analysis for Shatirah House Restaurant

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Shatirah House Restaurant.

So How Is Shatirah House Restaurant's ROCE Trending?

When we looked at the ROCE trend at Shatirah House Restaurant, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 18% from 26% 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.

What We Can Learn From Shatirah House Restaurant's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shatirah House Restaurant is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 14% over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One more thing, we've spotted 2 warning signs facing Shatirah House Restaurant that you might find interesting.

While Shatirah House Restaurant 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.