Are Investors Concerned With What's Going On At Aseer Trading Tourism and Manufacturing (TADAWUL:4080)?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Aseer Trading Tourism and Manufacturing (TADAWUL:4080), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What is it?

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 Aseer Trading Tourism and Manufacturing:

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

0.036 = ر.س85m ÷ (ر.س3.1b - ر.س750m) (Based on the trailing twelve months to September 2020).

So, Aseer Trading Tourism and Manufacturing has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Food industry average of 6.3%.

View our latest analysis for Aseer Trading Tourism and Manufacturing

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'd like to look at how Aseer Trading Tourism and Manufacturing has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trend of ROCE at Aseer Trading Tourism and Manufacturing is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 3.6% we see today. On top of that, the business is utilizing 38% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

What We Can Learn From Aseer Trading Tourism and Manufacturing's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. It should come as no surprise then that the stock has fallen 22% over the last five years, 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.

Like most companies, Aseer Trading Tourism and Manufacturing does come with some risks, and we've found 1 warning sign that you should be aware of.

While Aseer Trading Tourism and Manufacturing 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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