Can Al-Jouf Agricultural Development (TADAWUL:6070) Turn Things Around?

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Al-Jouf Agricultural Development (TADAWUL:6070), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)

0.029 = ر.س19m ÷ (ر.س730m - ر.س81m) (Based on the trailing twelve months to September 2020).

Therefore, Al-Jouf Agricultural Development has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Food industry average of 6.3%.

View our latest analysis for Al-Jouf Agricultural Development

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-Jouf Agricultural Development's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trend of returns that Al-Jouf Agricultural Development is generating are raising some concerns. The company used to generate 12% on its capital five years ago but it has since fallen noticeably. In addition to that, Al-Jouf Agricultural Development is now employing 27% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

What We Can Learn From Al-Jouf Agricultural Development's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Yet despite these concerning fundamentals, the stock has performed strongly with a 91% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 4 warning signs for Al-Jouf Agricultural Development (1 is significant) you should be aware of.

While Al-Jouf Agricultural Development may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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