Should You Be Impressed By Middle East Healthcare's (TADAWUL:4009) Returns on Capital?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Having said that, from a first glance at Middle East Healthcare (TADAWUL:4009) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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 Middle East Healthcare:

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

0.049 = ر.س126m ÷ (ر.س3.7b - ر.س1.2b) (Based on the trailing twelve months to September 2020).

So, Middle East Healthcare has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 7.2%.

See our latest analysis for Middle East Healthcare

Above you can see how the current ROCE for Middle East Healthcare 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 Middle East Healthcare here for free.

The Trend Of ROCE

When we looked at the ROCE trend at Middle East Healthcare, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.9% from 23% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Middle East Healthcare's current liabilities have increased over the last five years to 31% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 4.9%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Middle East Healthcare is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 32% over the last three years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Middle East Healthcare does have some risks though, and we've spotted 2 warning signs for Middle East Healthcare that you might be interested in.

While Middle East Healthcare 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. 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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