Alf Meem Yaa for Medical Supplies and Equipment (TADAWUL:9527) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Alf Meem Yaa for Medical Supplies and Equipment (TADAWUL:9527), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Alf Meem Yaa for Medical Supplies and Equipment, this is the formula:

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

0.27 = ر.س41m ÷ (ر.س202m - ر.س51m) (Based on the trailing twelve months to June 2024).

So, Alf Meem Yaa for Medical Supplies and Equipment has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

View our latest analysis for Alf Meem Yaa for Medical Supplies and Equipment

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'd like to look at how Alf Meem Yaa for Medical Supplies and Equipment has performed in the past in other metrics, you can view this free graph of Alf Meem Yaa for Medical Supplies and Equipment's past earnings, revenue and cash flow.

What Does the ROCE Trend For Alf Meem Yaa for Medical Supplies and Equipment Tell Us?

In terms of Alf Meem Yaa for Medical Supplies and Equipment's historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 44%, but they have dropped over the last four years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Alf Meem Yaa for Medical Supplies and Equipment has decreased its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Alf Meem Yaa for Medical Supplies and Equipment's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Alf Meem Yaa for Medical Supplies and Equipment is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 102% return over the last year, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Alf Meem Yaa for Medical Supplies and Equipment (of which 1 is significant!) that you should know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.