Ghida Al-Sultan (TADAWUL:9567) Will Want To Turn Around Its Return Trends

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Ghida Al-Sultan (TADAWUL:9567) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. 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).

Thus, Ghida Al-Sultan has an ROCE of 8.6%. On its own, that's a low figure but it's around the 11% average generated by the Hospitality industry.

Check out 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.

The Trend Of ROCE

When we looked at the ROCE trend at Ghida Al-Sultan, we didn't gain much confidence. Over the last three years, returns on capital have decreased to 8.6% from 20% three years ago. However it looks like Ghida Al-Sultan might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

Our Take On Ghida Al-Sultan's ROCE

To conclude, we've found that Ghida Al-Sultan is reinvesting in the business, but returns have been falling. Since the stock has declined 16% over the last year, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One more thing to note, we've identified 2 warning signs with Ghida Al-Sultan and understanding these should be part of your investment process.

While Ghida Al-Sultan 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.