Aljouf Mineral Water Bottling (TADAWUL:9532) Is Experiencing Growth In Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Aljouf Mineral Water Bottling's (TADAWUL:9532) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Aljouf Mineral Water Bottling, this is the formula:

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

0.057 = ر.س6.7m ÷ (ر.س199m - ر.س80m) (Based on the trailing twelve months to December 2022).

So, Aljouf Mineral Water Bottling has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Beverage industry average of 11%.

See our latest analysis for Aljouf Mineral Water Bottling

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 want to delve into the historical earnings, revenue and cash flow of Aljouf Mineral Water Bottling, check out these free graphs here.

So How Is Aljouf Mineral Water Bottling's ROCE Trending?

Aljouf Mineral Water Bottling is showing promise given that its ROCE is trending up and to the right. The figures show that over the last three years, ROCE has grown 156% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, Aljouf Mineral Water Bottling's current liabilities are still rather high at 40% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, we're delighted to see that Aljouf Mineral Water Bottling has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 21% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Aljouf Mineral Water Bottling does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

While Aljouf Mineral Water Bottling 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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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.