The Returns On Capital At Al-Jouf Agricultural Development (TADAWUL:6070) Don't Inspire Confidence

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. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Al-Jouf Agricultural Development (TADAWUL:6070), so let's see why.

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-Jouf Agricultural Development:

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

0.02 = ر.س12m ÷ (ر.س732m - ر.س95m) (Based on the trailing twelve months to December 2020).

Thus, Al-Jouf Agricultural Development has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Food industry average of 5.3%.

Check out 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're interested in investigating Al-Jouf Agricultural Development's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Al-Jouf Agricultural Development Tell Us?

The trend of returns that Al-Jouf Agricultural Development is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 2.0% we see today. On top of that, the business is utilizing 22% less capital within its operations. 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 summary, it's unfortunate that Al-Jouf Agricultural Development is shrinking its capital base and also generating lower returns. Since the stock has skyrocketed 287% 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.

One more thing: We've identified 3 warning signs with Al-Jouf Agricultural Development (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

While Al-Jouf Agricultural Development 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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