Is This A Sign of Things To Come At Middle East Company for Manufacturing and Producing Paper (TADAWUL:1202)?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Middle East Company for Manufacturing and Producing Paper (TADAWUL:1202), we weren't too hopeful.

Understanding 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. Analysts use this formula to calculate it for Middle East Company for Manufacturing and Producing Paper:

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

0.03 = ر.س35m ÷ (ر.س1.6b - ر.س423m) (Based on the trailing twelve months to September 2020).

Therefore, Middle East Company for Manufacturing and Producing Paper has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 6.5%.

View our latest analysis for Middle East Company for Manufacturing and Producing Paper

Historical performance is a great place to start when researching a stock so above you can see the gauge for Middle East Company for Manufacturing and Producing Paper's ROCE against it's prior returns. If you're interested in investigating Middle East Company for Manufacturing and Producing Paper's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Middle East Company for Manufacturing and Producing Paper's ROCE Trending?

In terms of Middle East Company for Manufacturing and Producing Paper's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 9.2%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Middle East Company for Manufacturing and Producing Paper to turn into a multi-bagger.

What We Can Learn From Middle East Company for Manufacturing and Producing Paper's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 36% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Middle East Company for Manufacturing and Producing Paper (including 2 which shouldn't be ignored) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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