Returns On Capital Signal Tricky Times Ahead For Shatirah House Restaurant (TADAWUL:9520)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Shatirah House Restaurant (TADAWUL:9520) 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 that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Shatirah House Restaurant:

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

0.071 = ر.س6.6m ÷ (ر.س146m - ر.س52m) (Based on the trailing twelve months to June 2023).

Thus, Shatirah House Restaurant has an ROCE of 7.1%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 15%.

See our latest analysis for Shatirah House Restaurant

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shatirah House Restaurant's ROCE against it's prior returns. If you're interested in investigating Shatirah House Restaurant's past further, check out this free graph covering Shatirah House Restaurant's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Shatirah House Restaurant's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 36% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Shatirah House Restaurant's current liabilities have increased over the last five years to 36% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 7.1%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

What We Can Learn From Shatirah House Restaurant's ROCE

To conclude, we've found that Shatirah House Restaurant is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 60% over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One final note, you should learn about the 5 warning signs we've spotted with Shatirah House Restaurant (including 2 which are potentially serious) .

While Shatirah House Restaurant 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.