Returns On Capital At Foods Gate Trading (TADAWUL:9562) Have Hit The Brakes

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. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Foods Gate Trading (TADAWUL:9562), we don't think it's current trends fit the mold of a multi-bagger.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Foods Gate Trading is:

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

0.16 = ر.س9.4m ÷ (ر.س70m - ر.س10m) (Based on the trailing twelve months to June 2024).

Therefore, Foods Gate Trading has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 8.6% it's much better.

See our latest analysis for Foods Gate Trading

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

What Does the ROCE Trend For Foods Gate Trading Tell Us?

Over the past three years, Foods Gate Trading's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Foods Gate Trading in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

One more thing to note, even though ROCE has remained relatively flat over the last three years, the reduction in current liabilities to 15% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

Our Take On Foods Gate Trading's ROCE

In summary, Foods Gate Trading isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Foods Gate Trading does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

While Foods Gate Trading 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.