Al-Jouf Agricultural Development (TADAWUL:6070) Is Doing The Right Things To Multiply Its Share Price

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Al-Jouf Agricultural Development's (TADAWUL:6070) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Al-Jouf Agricultural Development is:

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

0.088 = ر.س84m ÷ (ر.س1.2b - ر.س248m) (Based on the trailing twelve months to June 2024).

Thus, Al-Jouf Agricultural Development has an ROCE of 8.8%. In absolute terms, that's a low return and it also under-performs the Food industry average of 11%.

View our latest analysis for Al-Jouf Agricultural Development

Historical performance is a great place to start when researching a stock so above you can see the gauge for Al-Jouf Agricultural Development's ROCE against it's prior returns. If you'd like to look at how Al-Jouf Agricultural Development has performed in the past in other metrics, you can view this free graph of Al-Jouf Agricultural Development's past earnings, revenue and cash flow.

So How Is Al-Jouf Agricultural Development's ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 8.8%. The amount of capital employed has increased too, by 28%. So we're very much inspired by what we're seeing at Al-Jouf Agricultural Development thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 21% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

All in all, it's terrific to see that Al-Jouf Agricultural Development is reaping the rewards from prior investments and is growing its capital base. And a remarkable 251% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Al-Jouf Agricultural Development can keep these trends up, it could have a bright future ahead.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for 6070 on our platform that is definitely worth checking out.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.