What We Make Of Al Gassim Investment Holding's (TADAWUL:6020) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So on that note, Al Gassim Investment Holding (TADAWUL:6020) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Al Gassim Investment Holding is:

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

0.011 = ر.س4.1m ÷ (ر.س451m - ر.س95m) (Based on the trailing twelve months to September 2020).

Therefore, Al Gassim Investment Holding has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Food industry average of 6.3%.

See 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 of past earnings, revenue and cash flow.

How Are Returns Trending?

Al Gassim Investment Holding has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 1.1% on its capital. While returns have increased, the amount of capital employed by Al Gassim Investment Holding has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Bottom Line On Al Gassim Investment Holding's ROCE

As discussed above, Al Gassim Investment Holding appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 54% return over the last five years. 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 final note, you should learn about the 2 warning signs we've spotted with Al Gassim Investment Holding (including 1 which is a bit unpleasant) .

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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