Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Almarai (TADAWUL:2280) and its ROCE trend, we weren't exactly thrilled.
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. Analysts use this formula to calculate it for Almarai:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = ر.س2.7b ÷ (ر.س34b - ر.س5.3b) (Based on the trailing twelve months to September 2020).
Therefore, Almarai has an ROCE of 9.5%. In absolute terms, that's a low return, but it's much better than the Food industry average of 6.3%.
View 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 Does the ROCE Trend For Almarai Tell Us?
There are better returns on capital out there than what we're seeing at Almarai. The company has consistently earned 9.5% for the last five years, and the capital employed within the business has risen 27% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Key Takeaway
In summary, Almarai has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 64% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
One more thing to note, we've identified 1 warning sign with Almarai and understanding this should be part of your investment process.
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. 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.
