The Returns At Al Hammadi Company For Development and Investment (TADAWUL:4007) Aren't Growing

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at Al Hammadi Company For Development and Investment (TADAWUL:4007), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Al Hammadi Company For Development and Investment, this is the formula:

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

0.089 = ر.س185m ÷ (ر.س2.5b - ر.س415m) (Based on the trailing twelve months to March 2021).

Thus, Al Hammadi Company For Development and Investment has an ROCE of 8.9%. In absolute terms, that's a low return but it's around the Healthcare industry average of 8.2%.

View 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'd like to see what analysts are forecasting going forward, you should check out our free report for Al Hammadi Company For Development and Investment.

What Can We Tell From Al Hammadi Company For Development and Investment's ROCE Trend?

Over the past five years, Al Hammadi Company For Development and Investment's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Al Hammadi Company For Development and Investment doesn't end up being a multi-bagger in a few years time. That being the case, it makes sense that Al Hammadi Company For Development and Investment has been paying out 75% of its earnings to its shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

The Bottom Line

In a nutshell, Al Hammadi Company For Development and Investment has been trudging along with the same returns from the same amount of capital over the last five years. Unsurprisingly, the stock has only gained 8.0% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

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.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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