Here's What To Make Of Al Hammadi Company For Development and Investment's (TADAWUL:4007) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Al Hammadi Company For Development and Investment (TADAWUL:4007) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Al Hammadi Company For Development and Investment is:

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

0.077 = ر.س179m ÷ (ر.س2.7b - ر.س380m) (Based on the trailing twelve months to September 2020).

Thus, Al Hammadi Company For Development and Investment has an ROCE of 7.7%. On its own, that's a low figure but it's around the 7.2% average generated by the Healthcare industry.

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

Above you can see how the current ROCE for Al Hammadi Company For Development and Investment compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Al Hammadi Company For Development and Investment here for free.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at Al Hammadi Company For Development and Investment. Over the past five years, ROCE has remained relatively flat at around 7.7% and the business has deployed 33% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

In conclusion, Al Hammadi Company For Development and Investment has been investing more capital into the business, but returns on that capital haven't increased. And investors appear hesitant that the trends will pick up because the stock has fallen 21% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Al Hammadi Company For Development and Investment could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Al Hammadi Company For Development and Investment 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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