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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Almarai (TADAWUL:2280) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Almarai:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.087 = ر.س2.2b ÷ (ر.س32b - ر.س6.6b) (Based on the trailing twelve months to September 2021).
So, Almarai has an ROCE of 8.7%. Even though it's in line with the industry average of 8.7%, it's still a low return by itself.
Check out our latest analysis for Almarai
In the above chart we have measured Almarai's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Almarai.
What Can We Tell From Almarai's ROCE Trend?
Over the past five years, Almarai's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Almarai to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that Almarai has been paying out a decent 51% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
What We Can Learn From Almarai's ROCE
We can conclude that in regards to Almarai's returns on capital employed and the trends, there isn't much change to report on. And investors may be recognizing these trends since the stock has only returned a total of 26% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
On a separate note, we've found 1 warning sign for Almarai you'll probably want to know about.
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.
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About SASE:2280
Almarai
Operates as an integrated consumer food and beverage company in Saudi Arabia, Egypt, Jordan, and other Gulf Cooperation Council countries.
Established dividend payer and good value.
