The Trend Of High Returns At Halwani Bros (TADAWUL:6001) Has Us Very Interested

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Speaking of which, we noticed some great changes in Halwani Bros' (TADAWUL:6001) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Halwani Bros:

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

0.24 = ر.س141m ÷ (ر.س1.0b - ر.س435m) (Based on the trailing twelve months to March 2021).

Therefore, Halwani Bros has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Food industry average of 5.1%.

Check out our latest analysis for Halwani Bros

In the above chart we have measured Halwani Bros' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

Halwani Bros has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 23%. The company is now earning ر.س0.2 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 24% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a separate but related note, it's important to know that Halwani Bros has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In a nutshell, we're pleased to see that Halwani Bros has been able to generate higher returns from less capital. And a remarkable 129% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing, we've spotted 1 warning sign facing Halwani Bros that you might find interesting.

Halwani Bros is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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