If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Development Works Food (TADAWUL:9501) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. To calculate this metric for Development Works Food, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = ر.س2.7m ÷ (ر.س109m - ر.س22m) (Based on the trailing twelve months to June 2021).
So, Development Works Food has an ROCE of 3.1%. On its own, that's a low figure but it's around the 3.6% average generated by the Hospitality industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Development Works Food's ROCE against it's prior returns. If you'd like to look at how Development Works Food has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Development Works Food's ROCE Trend?
In terms of Development Works Food's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 34% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that Development Works Food 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 558% to shareholders in the last three years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Development Works Food (of which 2 shouldn't be ignored!) that you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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.
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