The Returns On Capital At Aseer Trading Tourism and Manufacturing (TADAWUL:4080) Don't Inspire Confidence

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Aseer Trading Tourism and Manufacturing (TADAWUL:4080), the trends above didn't look too great.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Aseer Trading Tourism and Manufacturing, this is the formula:

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

0.016 = ر.س37m ÷ (ر.س3.3b - ر.س904m) (Based on the trailing twelve months to March 2021).

Therefore, Aseer Trading Tourism and Manufacturing has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Food industry average of 5.1%.

Check out our latest analysis for Aseer Trading Tourism and Manufacturing

Historical performance is a great place to start when researching a stock so above you can see the gauge for Aseer Trading Tourism and Manufacturing's ROCE against it's prior returns. 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.

The Trend Of ROCE

In terms of Aseer Trading Tourism and Manufacturing's historical ROCE trend, it isn't fantastic. The company used to generate 4.9% on its capital five years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 36% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 28%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

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

In summary, it's unfortunate that Aseer Trading Tourism and Manufacturing is shrinking its capital base and also generating lower returns. However the stock has delivered a 59% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Aseer Trading Tourism and Manufacturing could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

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.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.