How Has National Agricultural Development (TADAWUL:6010) Allocated Its Capital?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into National Agricultural Development (TADAWUL:6010), we weren't too upbeat about how things were going.

Understanding 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. The formula for this calculation on National Agricultural Development is:

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

0.044 = ر.س117m ÷ (ر.س4.0b - ر.س1.4b) (Based on the trailing twelve months to September 2020).

So, National Agricultural Development has an ROCE of 4.4%. On its own, that's a low figure but it's around the 5.3% average generated by the Food industry.

See our latest analysis for National Agricultural Development

Above you can see how the current ROCE for National Agricultural Development compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for National Agricultural Development.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at National Agricultural Development. To be more specific, the ROCE was 6.0% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect National Agricultural Development to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that National Agricultural Development is generating lower returns from the same amount of capital. Since the stock has skyrocketed 106% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

National Agricultural Development does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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