Shatirah House Restaurant (TADAWUL:9520) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 investigating Shatirah House Restaurant (TADAWUL:9520), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. 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)

0.15 = ر.س15m ÷ (ر.س154m - ر.س51m) (Based on the trailing twelve months to June 2022).

Therefore, Shatirah House Restaurant has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 13% generated by the Hospitality industry.

Check out 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're interested in investigating Shatirah House Restaurant's past further, check out this free graph of 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. Around four years ago the returns on capital were 35%, but since then they've fallen to 15%. 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.

On a side note, Shatirah House Restaurant's current liabilities have increased over the last four years to 33% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 15%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

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. However, despite the promising trends, the stock has fallen 46% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing to note, we've identified 2 warning signs with Shatirah House Restaurant and understanding them should be part of your investment process.

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.