Be Wary Of Ghida Al-Sultan (TADAWUL:9567) And Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Ghida Al-Sultan (TADAWUL:9567), it didn't seem to tick all of these boxes.

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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. The formula for this calculation on Ghida Al-Sultan is:

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

0.086 = ر.س7.6m ÷ (ر.س112m - ر.س23m) (Based on the trailing twelve months to June 2024).

So, Ghida Al-Sultan has an ROCE of 8.6%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 15%.

See our latest analysis for Ghida Al-Sultan

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 Ghida Al-Sultan.

What Can We Tell From Ghida Al-Sultan's ROCE Trend?

On the surface, the trend of ROCE at Ghida Al-Sultan doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last three years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Ghida Al-Sultan's ROCE

Bringing it all together, while we're somewhat encouraged by Ghida Al-Sultan's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 20% over the last year, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Ghida Al-Sultan does have some risks though, and we've spotted 4 warning signs for Ghida Al-Sultan that you might be interested in.

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.

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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.