Naqi Water's (TADAWUL:2282) Returns On Capital Not Reflecting Well On The Business

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Naqi Water (TADAWUL:2282), we don't think it's current trends fit the mold of a multi-bagger.

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What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Naqi Water, this is the formula:

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

0.095 = ر.س27m ÷ (ر.س316m - ر.س34m) (Based on the trailing twelve months to September 2024).

So, Naqi Water has an ROCE of 9.5%. In absolute terms, that's a low return but it's around the Beverage industry average of 12%.

Check out our latest analysis for Naqi Water

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Naqi Water, we didn't gain much confidence. To be more specific, ROCE has fallen from 32% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Naqi Water's ROCE

In summary, we're somewhat concerned by Naqi Water's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 25% over the last year, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know about the risks facing Naqi Water, we've discovered 1 warning sign that you should be aware of.

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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.