Al Hammadi Company For Development and Investment (TADAWUL:4007) Is Looking To Continue Growing Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, we've noticed some promising trends at Al Hammadi Company For Development and Investment (TADAWUL:4007) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Al Hammadi Company For Development and Investment:

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

0.095 = ر.س200m ÷ (ر.س2.5b - ر.س356m) (Based on the trailing twelve months to September 2021).

Thus, Al Hammadi Company For Development and Investment has an ROCE of 9.5%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 13%.

See our latest analysis for Al Hammadi Company For Development and Investment

In the above chart we have measured Al Hammadi Company For Development and Investment's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Al Hammadi Company For Development and Investment's ROCE Trending?

Al Hammadi Company For Development and Investment has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 38% in that same time. 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. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

What We Can Learn From Al Hammadi Company For Development and Investment's ROCE

As discussed above, Al Hammadi Company For Development and Investment appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 30% to shareholders. So with that in mind, we think the stock deserves further research.

Like most companies, Al Hammadi Company For Development and Investment does come with some risks, and we've found 1 warning sign that you should be aware of.

While Al Hammadi Company For Development and Investment 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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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.