Al Gassim Investment Holding (TADAWUL:6020) Could Be At Risk Of Shrinking As A Company

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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 indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Al Gassim Investment Holding (TADAWUL:6020), we've spotted some signs that it could be struggling, so let's investigate.

Understanding 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 Al Gassim Investment Holding:

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

0.0049 = ر.س1.7m ÷ (ر.س433m - ر.س82m) (Based on the trailing twelve months to September 2024).

Therefore, Al Gassim Investment Holding has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Food industry average of 15%.

Check out our latest analysis for Al Gassim Investment Holding

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're interested in investigating Al Gassim Investment Holding's past further, check out this free graph covering Al Gassim Investment Holding's past earnings, revenue and cash flow.

What Can We Tell From Al Gassim Investment Holding's ROCE Trend?

We are a bit worried about the trend of returns on capital at Al Gassim Investment Holding. Unfortunately the returns on capital have diminished from the 1.3% that they were earning five years ago. 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 Al Gassim Investment Holding to turn into a multi-bagger.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 19%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 0.5%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Al Gassim Investment Holding's ROCE

In summary, it's unfortunate that Al Gassim Investment Holding is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 91% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 1 warning sign for Al Gassim Investment Holding you'll probably want to know about.

While Al Gassim Investment Holding isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.